Income Taxes

Income Tax Provision

The components of the provision for income taxes were as follows:



	Years ended December 31,
(Dollars in thousands)	2014			2013			2012
Current provision (benefit)
Federal	$	15,277		$	(6,137	)	$	3,872
State and local	502			2,145			34
Foreign	3,438			873			2,566
Total current provision (benefit)	19,217			(3,119		)	6,472
Deferred provision (benefit)
Federal	41,087			41,832			45,920
Federal net operating loss	14,522			14,369			11,166
State and local	4,207			5,608			5,270
State tax rate change	(5,374		)	—			—
Foreign	(1		)	(3,478		)	(2,420		)
Total deferred provision	54,441			58,331			59,936
Income tax provision	$	73,658		$	55,212		$	66,408

Income taxes have been provided for foreign operations based upon the various tax laws and rates of the countries in which operations are conducted. The components of income before income taxes were as follows:



	Years ended December 31,
(Dollars in thousands)	2014			2013			2012
U.S. sources	$	211,045		$	157,074		$	164,619
Non-U.S. sources	(348		)	(2,709		)	6,335
Income before income tax provision	$	210,697		$	154,365		$	170,954

Con-way's income tax provision varied from the amounts calculated by applying the U.S. statutory income tax rate to the pretax income as shown in the following reconciliation:



	Years ended December 31,
	2014		2013		2012
Federal statutory tax rate of 35%	35.0	%	35.0	%	35.0	%
State income tax, net of federal income tax benefit	1.8		4.7		3.1
State tax rate change, net of federal income tax benefit	(2.6	)	—		—
Foreign taxes greater (less) than U.S. statutory rate	1.1		(1.1	)	(1.2	)
Non-deductible operating expenses and tax-exempt income	0.6		0.7		—
Foreign taxes eligible for US foreign tax credit	0.6		0.5		0.5
Fuel tax credit	(1.8	)	(4.5	)	(0.1	)
IRS audit	—		(0.4	)	1.5
Other, net	0.3		0.9		—
Effective income tax rate	35.0	%	35.8	%	38.8	%

During the fourth quarter of 2014, Con-way changed the rate it uses to value its deferred tax assets and liabilities. The change in rate, the effect of which is shown above, was exclusively related to a change in the forward-looking estimate of the average state income tax rate. There are many factors that went into evaluating the estimate of this rate including changes in individual state income tax rates, changes in the geographic distribution of Con-way's business operations in the U.S. and the different nature of its operations in certain jurisdictions.

Current and Deferred Income Tax Balances

The components of deferred tax assets and liabilities related to the following:



(Dollars in thousands)	December 31,
	2014			2013
Deferred tax assets
Employee benefits	$	96,420		$	91,474
Self-insurance accruals	26,296			23,042
Domestic operating-loss carryforwards	6,156			22,461
Foreign operating-loss carryforwards	16,723			16,832
Tax-credit carryforwards	10,785			10,019
Share-based compensation	15,171			16,551
Other	11,204			11,471
Valuation allowance	(26,019		)	(25,358		)
Total deferred tax assets	156,736			166,492
Deferred tax liabilities
Property, plant and equipment	351,684			348,728
Prepaid expenses	21,789			24,401
Revenue	6,624			9,013
Other	5,471			6,967
Total deferred tax liabilities	385,568			389,109
Net deferred tax liability	$	(228,832	)	$	(222,617	)

Deferred tax assets and liabilities in the consolidated balance sheets are classified as current or non-current based on the related asset or liability creating the deferred tax. Deferred taxes not related to a specific asset or liability are classified based on the estimated period of reversal.

At December 31, 2014, Con-way had no federal tax loss carryforward. Other carryforwards, including state tax credits, foreign taxes creditable against federal tax, and state and foreign tax losses, may create future benefits. The resulting potential benefit of the future use of all tax losses, including domestic and foreign, is $22.9 million while tax credit carryforwards provide a potential benefit of $10.8 million. Because Con-way does not anticipate that certain future state and foreign taxable income will allow realization of the full benefits, management concluded that these assets fail to meet the more-likely-than-not threshold for realization. In light of this, these combined future tax benefits of $33.7 million have been offset by a valuation allowance of $26.0 million.

For all other deferred tax assets, management believes it is more likely than not that the results of future operations will generate taxable income of a sufficient amount and type to realize these deferred tax assets.

Certain capital expenditures made between September 9, 2010 and December 31, 2014 were eligible for bonus depreciation, and in accordance with this provision of U.S. tax law, Con-way deducted a substantial portion of its capital expenditures made during the 2010 through 2014 tax years. Additionally, the alternative-fuel credit was extended to 2014 by the Tax Increase Prevention Act of 2014. Also, in January 2013, the American Taxpayer Relief Act of 2012 extended the alternative-fuel credit to the 2012 and 2013 tax years. Con-way recorded a discrete benefit of $3.3 million in the first quarter of 2013 to recognize the effect of the credit associated with the 2012 tax year. The alternative-fuel credit for the 2013 tax year was recognized over the course of 2013.

No deferred taxes have been provided for the cumulative undistributed earnings of Con-way's foreign subsidiaries ($32.4 million at December 31, 2014), which if remitted, are subject to withholding and U.S. taxes. Such amounts have been indefinitely reinvested in the respective foreign subsidiaries' operations until it becomes advantageous for tax or foreign exchange reasons to remit these earnings. Determination of the amount of any unrecognized deferred income tax liability on this temporary difference is not practicable.

Uncertain Tax Positions

Con-way recognizes tax positions in the financial statements only when it is more likely than not that the position will be sustained upon examination by a taxing authority. If the position meets the more-likely-than-not criteria, it is measured using a probability-weighted approach as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold are derecognized in the first subsequent financial reporting period in which the threshold is no longer met.

During 2014 and 2013, the estimate for uncertain tax positions decreased to $8.1 million and $11.9 million, respectively (including $3.1 million and $3.5 million of accrued interest and penalties), primarily due to the lapse of statute of limitations and settlements with various taxing authorities, more fully discussed below.

At December 31, 2014 and 2013, Con-way estimated that $3.7 million and $6.5 million, respectively, of the unrecognized tax benefits, if recognized, would change the effective tax rate. In 2014, a $0.4 million reversal of interest and penalties was included in income tax expense compared to $1.8 million in 2013.

The following summarizes the changes in the unrecognized tax benefits during the year, excluding interest and penalties:



(Dollars in thousands)
Balance at December 31, 2012	$	9,728
Gross increases — prior-period tax positions	14
Gross increases — current-period tax positions	1,376
Gross decreases — prior-period tax positions	(602		)
Lapse of statute of limitations	(2,128		)
Balance at December 31, 2013	8,388
Gross increases — current-period tax positions	853
Gross decreases — prior-period tax positions	(900		)
Gross decreases — settlements	(1,744		)
Lapse of statute of limitations	(1,661		)
Balance at December 31, 2014	$	4,936

In the normal course of business, Con-way is subject to examination by taxing authorities throughout the world. As a result of these examinations, Con-way maintains ongoing discussions and negotiations relating to tax matters with the taxing authorities in these various jurisdictions.

Con-way is subject to examination for federal income taxes for tax years 2008 forward. In 2013, Con-way entered the Compliance Assurance Program ("CAP"). CAP is designed to make audits more effective, efficient and current such that when the federal tax return is filed for the current year it has been approved by the Internal Revenue Service ("IRS").

In 2012, the IRS finished its field audit of the 2008 through 2010 tax years and an issue emerged that resulted in an increase to the estimate for uncertain tax positions in 2012. Con-way settled this issue in 2013 and paid the related liability in 2014.

Con-way is also subject to examination by state, local, and foreign jurisdictions for 2004 to 2013. Con-way is currently under audit in several state and foreign tax jurisdictions, and management expects that there will be no material change to the unrecognized tax benefits due to expected increases being substantially offset by lapses of applicable statutes of limitations.