Income Taxes

The components of income before income taxes and provision for income taxes for the years ended December 31 are as follows:



	2013			2012			2011
Income before income taxes
Domestic	$	64.9		$	46.6		$	34.6
Foreign	62.5			58.5			66.9
	$	127.4		$	105.1		$	101.5
Income tax provision
Current tax provision (benefit):
Federal	$	19.7		$	15.3		$	2.8
State	2.0			1.2			0.3
Foreign	5.1			4.1			7.2
Total current	$	26.8		$	20.6		$	10.3
Deferred tax provision (benefit):
Federal	$	(0.4	)	$	(1.3	)	$	10.5
State	0.9			(7.2		)	—
Foreign	(10.1		)	(5.1		)	(1.9		)
Total deferred	$	(9.6	)	$	(13.6	)	$	8.6
	$	17.2		$	7.0		$	18.9

The Company made income tax payments of $38.1 million, $17.2 million and $15.6 million during 2013, 2012 and 2011, respectively. Income tax refunds of $3.4 million, $1.5 million and $8.0 million were received by the Company during 2013, 2012 and 2011, respectively.

A reconciliation of the federal statutory and effective income tax rate for the year ended December 31 is as follows:



	2013			2012			2011
Income before income taxes	$	127.4		$	105.1		$	101.5
Statutory taxes at 35.0%	$	44.6		$	36.8		$	35.5
Valuation allowance	(12.1		)	(19.7		)	(9.9		)
Foreign rate differences	(11.4		)	(9.9		)	(8.7		)
Equity interest earnings	(1.2		)	(1.6		)	(1.9		)
Unremitted foreign earnings	(1.2		)	(1.1		)	1.5
R&D and other federal credits	(2.4		)	(0.7		)	(0.7		)
State income taxes	2.0			2.0			2.6
Non-deductible expenses	0.3			0.8			0.7
Tax controversy resolution	(1.8		)	0.1			0.1
Other	0.4			0.3			(0.3		)
Income tax provision	$	17.2		$	7.0		$	18.9
Effective income tax rate	13.5		%	6.7		%	18.6		%

As of December 31, 2013, the cumulative unremitted earnings of the Company's non-U.S. subsidiaries are approximately $303.3 million. The Company repatriated earnings of its European subsidiaries of $30 million and $50 million during 2013 and 2012, respectively. There were no distributions of unremitted earnings in 2011. The Company estimates that approximately $45 million to $55 million of its unremitted foreign earnings may be repatriated in the foreseeable future. As a result of this determination, the Company has provided a deferred tax liability with respect to these earnings of $7.4 million at December 31, 2013. The Company has continued to conclude that predominantly all remaining foreign earnings in excess of this amount will be indefinitely reinvested in its non-U.S. operations and, therefore, the recording of deferred tax liabilities for such unremitted earnings is not required. It is impracticable to determine the total amount of unrecognized deferred taxes with respect to these permanently reinvested earnings; however, foreign tax credits would be available to partially reduce U.S. income taxes in the event of a distribution.

A detailed summary of the total deferred tax assets and liabilities in the Consolidated Balance Sheets resulting from differences in the book and tax basis of assets and liabilities follows:



	December 31
	2013		2012
Deferred tax assets
Accrued expenses and reserves	$	32.7	$	30.6
Accrued pension benefits	4.9		14.3
Tax attribute carryforwards	34.9		44.3
Other employee benefits	9.6		8.2
Other	1.0		0.6
Total deferred tax assets	83.1		98.0
Less: Valuation allowance	31.7		47.1
	51.4		50.9
Deferred tax liabilities
Depreciation	8.9		7.9
Inventories	6.9		8.3
Unremitted earnings	7.4		8.2
Total deferred tax liabilities	23.2		24.4
Net deferred tax asset	$	28.2	$	26.5

The following table summarizes the tax carryforwards and associated carryforward periods and related valuation allowances where the Company has determined that realization is uncertain:



	December 31, 2013
	Net deferred tax asset		Valuation allowance		Carryforwards expire during:
Non-U.S. net operating loss	$	21.4	$	15.0	2014-Indefinite
State losses and credits	5.1		1.6		2014-2030
State and Non-U.S. Capital losses	8.4		8.4		2014-Indefinite
Total	$	34.9	$	25.0



	December 31, 2012
	Net deferred tax asset		Valuation allowance		Carryforwards expire during:
Non-U.S. net operating loss	$	28.9	$	23.2	2013-Indefinite
State losses and credits	5.7		1.1		2013-2030
State and Non-U.S. Capital losses	9.7		9.7		2014-Indefinite
Total	$	44.3	$	34.0

The establishment of a valuation allowance does not have an impact on cash, nor does such an allowance preclude the Company from using its loss carryforwards or other deferred tax assets in future periods. The tax net operating losses that comprise a substantial portion of the Australian deferred tax assets do not expire under local law and the U.S. state taxing jurisdictions individually can provide for a carryforward period that extends for up to 20 years.

The Company's operations emerged from a three-year cumulative loss with respect to its Australian, certain European and U.S. taxing jurisdictions during 2012. The Company evaluated all the positive and negative evidence with respect to the realization of the deferred tax assets in these taxing jurisdictions. Based upon the scheduling of deferred temporary differences, the projection of future taxable income in each taxing jurisdiction and the assessment of economic risks impacting each of these specific geographic regions, the Company determined that certain portions of both the U.S. state and Australian deferred tax assets were realizable and met the more likely than not threshold for a release of the associated valuation allowance. Accordingly, the Company released $10.7 million of its valuation allowance primarily with respect to its U.S. state and Australian deferred tax assets.

During the second quarter of 2013, the Company determined that its United Kingdom deferred tax assets met the more likely than not threshold required for realization based upon the anticipated timing of deferred temporary differences, the continuing trend of earnings, the projection of future taxable income, and the improving assessment of the economic environment affecting the Company's European operations. Accordingly, the income tax provision for the second quarter of 2013 contains a net release of valuation allowance of $12.8 million.

During both 2013 and 2012, the net valuation allowance provided against certain deferred tax assets decreased by $15.4 million. The change in the total valuation allowance in 2013 and 2012 included a net decrease in tax expense of $12.1 million and $19.7 million, respectively, and a net change in the overall U.S. dollar value of valuation allowances previously recorded in foreign currencies and amounts recorded directly in equity of a net decrease of $3.3 million in 2013 and a net increase of $4.3 million in 2012.

Based upon the review of historical earnings and trends, forecasted earnings and the relevant expiration of carryforwards, the Company believes the valuation allowances provided are appropriate. At December 31, 2013, the Company had gross net operating loss carryforwards in non-U.S. jurisdictions of $75.7 million and U.S. state jurisdictions of $84.3 million.

The tax returns of the Company and certain of its non-U.S. subsidiaries are under routine examination by various taxing authorities. The Company has not been informed of any material assessment for which an accrual has not been previously provided and the Company would vigorously contest any material assessment. Management believes any potential adjustment would not materially affect the Company's financial condition or results of operations.

The following is a reconciliation of total gross unrecognized tax benefits, defined as the aggregate tax effect of differences between tax return positions and the benefits recognized in the consolidated financial statements for the years ended December 31, 2013, 2012 and 2011. Approximately $5.2 million, $6.7 million and $7.7 million of these amounts as of December 31, 2013, 2012 and 2011, respectively, relate to permanent items that, if recognized, would impact the effective income tax rate. This amount differs from gross unrecognized tax benefits presented in the table below for 2013 and 2012 due to the decrease in U.S. federal income taxes which would occur upon the recognition of the state tax benefits included herein.



	2013			2012			2011
Balance at January 1	$	6.8		$	7.7		$	7.9
Additions for tax positions of prior years	0.1			0.2			0.1
Additions based on tax positions related to the current year	0.9			0.9			1.0
Reductions due to settlements with taxing authorities and the lapse of the applicable statute of limitations	(2.7		)	(2.2		)	(1.2		)
Other changes in unrecognized tax benefits including foreign currency translation adjustments	0.2			0.2			(0.1		)
Balance at December 31	$	5.3		$	6.8		$	7.7

The Company records interest and penalties on uncertain tax positions as a component of the income tax provision. The Company recorded a net decrease of $0.1 million in interest and penalties during 2013 and no net change during 2012 and 2011. The total amount of interest and penalties accrued was $0.3 million as of December 31, 2013 and $0.4 million as of December 31, 2012 and 2011.

The Company expects the amount of unrecognized tax benefits will change within the next twelve months; however, the change in unrecognized tax benefits, which is reasonably possible within the next twelve months, is not expected to have a significant effect on the Company's financial position or results of operations. It is reasonably possible the Company will record unrecognized tax benefits within the next twelve months in the range of zero to $1.5 million resulting from the possible expiration of certain statutes of limitation and settlement of audits. If recognized, the previously unrecognized tax benefits will be recorded as discrete tax benefits in the quarter in which the items are effectively settled.

In general, the Company operates in taxing jurisdictions that provide a statute of limitations period ranging from three to five years for the taxing authorities to review the applicable tax filings. The examination of the U.S. federal tax returns for the 2007 and 2008 tax years was completed in 2011 except for one issue that was settled favorably in the Internal Revenue Service Appeals process in November 2012. The examination of the 2009 and 2010 U.S. federal tax returns commenced in February 2012 and was completed in the first quarter of 2013 with acceptance by Joint Committee in the third quarter of 2013. The examination of the U.S. federal tax returns for the 2011 and 2012 tax years, including the post spin-off short period return for 2012, began in the third quarter of 2013 and is expected to be completed during 2014. The discussion above regarding the U.S. federal tax returns and audits reflects the impact upon the Company as a member of the consolidated federal tax return of NACCO for the 2012 tax year and prior. As a result of the spin-off, the Company filed a separate U.S. federal tax return for the period from the spin-off through December 31, 2012. The Company is currently under examination in various state and non-U.S. jurisdictions for which the statute of limitations has been extended. The Company believes these examinations are routine in nature and are not expected to result in any material tax assessments.