Income Taxes

Provision for Income Taxes

The Company’s income (loss) from continuing operations before taxes is as follows:



(in thousands) For year ended December 31,	2013		2012		2011
U.S. operations	$	177,257	$	175,055	$	(121,411	)
Non-U.S. operations	148,759		109,550		136,172
Total	$	326,016	$	284,605	$	14,761

The Company’s provision (benefit) for income taxes from continuing operations consists of:



(in thousands) For year ended December 31,	2013		2012		2011
Current:
U.S. federal tax	$	11,401	$	5,154	$	1,124
U.S. state and local tax	3,366		1,948		1,928
Non-U.S. tax	41,334		26,314		32,816
Total current	56,101		33,416		35,868
Deferred:
U.S. federal tax	43,743		52,948		(45,576		)
U.S. state and local tax	628		1,068		524
Non-U.S. tax	4,593		984		1,129
Total deferred	48,964		55,000		(43,923		)
Total provision (benefit) for income taxes	$	105,065	$	88,416	$	(8,055	)

A reconciliation of the statutory U.S. federal tax rate to the Company’s effective tax rate from continuing operations is as follows:



(in thousands) For year ended December 31,	2013		2012		2011
Statutory U.S. federal tax rate	35.0	%	35.0	%	35.0	%
Increase (reduction) from:
Non-U.S. taxes	(2.0	)%	(4.0	)%	(98.4	)%
Repatriation of non-U.S. earnings, net of credits	0.1	%	0.1	%	8.8	%
State and local taxes, net of federal benefit	1.2	%	1.1	%	18.4	%
U.S. research and development tax credit	(1.9	)%	(0.3	)%	(15.3	)%
U.S. domestic manufacturing deduction	(1.0	)%	(0.9	)%	(12.7	)%
Non-deductible acquisition costs	2.3	%	0.5	%	—	%
Other	(1.5	)%	(0.4	)%	8.9	%
Effective tax rate	32.2	%	31.1	%	(55.3	)%

As of December 31, 2013, the Company has not provided deferred taxes on approximately $520 million of undistributed earnings of its non-U.S. subsidiaries because the Company intends to permanently reinvest these earnings outside the U.S. Determination of the U.S. income taxes and non-U.S. withholding taxes due upon the repatriation of these earnings is not practicable because the amount of such taxes depends upon circumstances existing when the remittance occurs.

At December 31, 2013 and 2012, $257 million and $321 million, respectively of the Company’s cash was held by non-U.S. subsidiaries, and is generally subject to U.S. income taxation upon repatriation.

During 2013, 2012 and 2011, income tax benefits attributable to equity-based compensation transactions exceeded amounts recorded at grant date fair market value and, accordingly, were credited to capital surplus in the amounts of $6.4 million, $3.6 million and $6.1 million, respectively.

During 2013, 2012 and 2011, tax provision (benefit) of $36.2 million, $(13.4) million, and $(44.1) million, respectively, related to changes in pension and post-retirement plan assets and benefit obligations, were recorded to accumulated other comprehensive income.

Deferred Taxes and Valuation Allowances

The components of deferred tax assets and liabilities included on the Company’s Consolidated Balance Sheets are as follows:



(in thousands) December 31,	2013			2012
Deferred tax assets:
Asbestos-related liabilities	$	206,178		$	230,166
Tax loss and credit carryforwards	136,224			77,098
Pension and post-retirement benefits	29,098			66,313
Inventories	20,334			12,827
Accrued bonus and stock-based compensation	17,003			12,470
Environmental reserves	9,920			12,614
Other	43,674			42,348
Total	462,431			453,836
Less: valuation allowance	150,591			115,014
Total deferred tax assets, net of valuation allowance	311,840			338,822
Deferred tax liabilities:
Basis difference in intangible assets	(141,762		)	(78,086		)
Basis difference in fixed assets	(28,287		)	(30,130		)
Total deferred tax liabilities	(170,049		)	(108,216		)
Net deferred tax asset	$	141,791		$	230,606
Balance sheet classification:
Current deferred tax assets	31,651			$	21,618
Long-term deferred tax assets	186,734			245,843
Accrued liabilities	(553		)	(2		)
Long-term deferred tax liability	(76,041		)	(36,853		)
Net deferred tax asset	$	141,791		$	230,606

As of December 31, 2013, the Company had U.S. federal, U.S. state and non-U.S. tax loss and credit carryforwards that will expire, if unused, as follows:



(in thousands) Year of expiration	U.S. Federal Tax Credits			U.S. Federal Tax Losses			U.S. State Tax Credits			U.S. State Tax Losses			Non- U.S. Tax Losses			Total
2014-2018	$	13,036		$	—		$	2,316		$	50,317		$	4,718
After 2018	8,344			77,262			4,047			678,731			64,548
Indefinite	157			—			16,570			—			60,599
Total tax carryforwards	$	21,537		$	77,262		$	22,933		$	729,048		$	129,865
Deferred tax asset on tax carryforwards	$	21,537		$	27,042		$	14,906		$	35,178		$	37,561		$	136,224
Valuation allowance on tax carryforwards	(21,351		)	(373		)	(14,280		)	(35,178		)	(37,561		)	(108,743		)
Net deferred tax asset on tax carryforwards	$	186		$	26,669		$	626		$	—		$	—		$	27,481

At December 31, 2013 and 2012, the Company determined that it was more likely than not that $108.7 million and $62.1 million, respectively, of its deferred tax assets related to tax loss and credit carryforwards will not be realized. As a result, the Company recorded a valuation allowance against these deferred tax assets. The Company also determined that it is more likely than not that a portion of the benefit related to U.S. state and non-U.S. deferred tax assets other than tax loss and credit carryforwards will be not realized. Accordingly, at December 31, 2013 and 2012, a valuation allowance of $41.9 million and $52.9 million, respectively, was established against these U.S. state and non-U.S. deferred tax assets. The Company’s total valuation allowance at December 31, 2013 and 2012 was $150.6 million and $115.0 million, respectively.

Unrecognized Tax Benefits

A reconciliation of the beginning and ending amount of the Company’s gross unrecognized tax benefits, excluding interest and penalties, is as follows:



(in thousands)	2013			2012			2011
Balance of liability as of January 1	$	19,164		$	9,590		$	3,725
Increase as a result of tax positions taken during a prior year	6,728			5,941			3,334
Decrease as a result of tax positions taken during a prior year	(243		)	(25		)	(19		)
Increase as a result of tax positions taken during the current year	5,897			3,893			2,876
Decrease as a result of settlements with taxing authorities	(28		)	—			—
Reduction as a result of a lapse of the statute of limitations	(139		)	(235		)	(326		)
Balance of liability as of December 31	$	31,379		$	19,164		$	9,590

As of December 31, 2013, 2012 and 2011, the amount of the Company’s unrecognized tax benefits that, if recognized, would affect its effective tax rate was $27.7 million, $18.9 million, and $9.3 million, respectively. The difference between these amounts and those reflected in the table above relates to (1) offsetting tax effects from other tax jurisdictions, (2) interest expense, net of deferred taxes, and (3) unrecognized tax benefits whose reversal during 2014 would be recorded to goodwill.

The Company recognizes interest and penalties related to unrecognized tax benefits as a component of its income tax expense. During the years ended December 31, 2013, 2012 and 2011, the Company recognized interest and penalty expense of $0.9 million, $0.4 million, and $0.2 million, respectively, in its Consolidated Statements of Operations. At December 31, 2013 and 2012, the Company had accrued $4.0 million and $1.0 million, respectively, of interest and penalties related to unrecognized tax benefits in its Consolidated Balance Sheets.

During the next twelve months, it is reasonably possible that resolutions of tax examinations, settlements with tax authorities, and the expiration of statutes of limitations could reduce the Company's unrecognized tax benefits by $3.3 million

Income Tax Examinations

The Company's income tax returns are subject to examination by U.S. federal, U.S. state and local, and non-U.S. tax authorities.

In the fourth quarter of 2013, the U.S. Internal Revenue Service began an examination of the Company’s consolidated U.S. federal income tax returns for the years ended December 31, 2010 and December 31, 2011. The Company’s consolidated U.S. federal income tax return for 2012 and certain consolidated U.S. federal tax carryforwards generated before 2010 remain subject to examination, as do acquired subsidiaries’ U.S. federal income tax returns for 2009 through 2012 and certain acquired U.S. federal tax carryforwards generated before 2009.

With few exceptions, the Company is no longer subject to U.S. state and local or non-U.S. income tax examinations for years before 2008. During 2013, a Hungarian income tax examination of 2009 and 2010 was completed and an assessment of $0.3 million issued, for which an accrual was previously established. As of December 31, 2013, the Company and its subsidiaries are under examination in various jurisdictions, including Germany (2006 through 2011) and California (2007 and 2008). In addition, the Company’s appeal of certain Candian tax assessments (2007 through 2009) is on-going.

The Company believes it has provided adequate income tax accruals for all jurisdictions' open years; however, the ultimate resolution of all income tax examinations is uncertain. If issues raised during examinations of the Company’s income tax returns are not resolved in a manner consistent with management’s expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs.