NOTE 14. INCOME TAXES

The tax effects of principal temporary differences between the carrying amounts of assets and liabilities and their tax bases are summarized in the following table. Management believes it is more likely than not that the results of future operations will generate sufficient taxable income and foreign source income to realize deferred tax assets, net of valuation allowances. In arriving at this conclusion, we considered the profit before tax generated for the years 2012 through 2014, as well as future reversals of existing taxable temporary differences and projections of future profit before tax and foreign source income.

We reduce the carrying amounts of deferred tax assets by a valuation allowance if, based on the available evidence, it is more likely than not that such assets will not be realized. The need to establish valuation allowances for deferred tax assets is assessed quarterly. In assessing the requirement for, and amount of, a valuation allowance in accordance with the more likely than not standard for all periods, we give appropriate consideration to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability and foreign source income, the duration of statutory carryforward periods, and our experience with operating loss and tax credit carryforward expirations. A history of cumulative losses is a significant piece of negative evidence used in our assessment. If a history of cumulative losses is incurred for a tax jurisdiction, forecasts of future profitability are not used as positive evidence related to the realization of the deferred tax assets in the assessment.

At December 31, 2014 and 2013, we had valuation allowances of $87.9 million and $109.3 million, respectively. At December 31, 2014, our valuation allowance consisted of $31.6 million for statutorily limited federal NOL carryforwards, $14.6 million for state deferred tax assets, primarily operating loss carryforwards, and $41.7 million for foreign deferred tax assets, primarily foreign operating loss carryforwards.

At December 31, 2014 and 2013, we had $969.6 million and $1,067.3 million, respectively, of state NOL carryforwards expiring between 2015 and 2034. In addition, at December 31, 2014 and 2013, we had $158.3 million and $252.8 million, respectively, of foreign NOL carryforwards, $58.4 million available for carryforward indefinitely and $99.9 million which expire between 2015 and 2032. At December 31, 2014 and 2013, we also had U.S. foreign tax credit (“FTC”) carryforwards of $54.3 million on a gross basis, $12.1 million when netted with unrecognized tax benefits, and $94.4 million, respectively, expiring between 2015 and 2022. The FTC carryforward at December 31, 2013 was presented on a gross basis as accounting guidance issued in ASU 2013-11 did not require retrospective application. The guidance was applied prospectively upon adoption on January 1, 2014.

Our valuation allowances at December 31, 2014 of $87.9 million decreased from December 31, 2013 by $21.4 million. The valuation allowance for foreign deferred tax assets decreased by $32.9 million, primarily as a result of the permanent loss of foreign NOLs from activities surrounding the insolvency of our former German subsidiary. The decrease was partially offset by increases from current year operating losses and increases in other deferred assets. The valuation allowance for federal statutorily limited federal losses of $31.6 million increased $6.3 million. The valuation allowance for state deferred tax assets of $14.6 million increased by $5.2 as a result of decreases in projected income which resulted in decreased utilization before expiration.

We estimate we will need to generate future federal taxable income of $155.2 million, including foreign source income of $51.7 million, to fully realize the FTCs before they expire in 2022. We estimate we will need to generate future taxable income of approximately $1,012.8 million for state income tax purposes during the respective realization periods (ranging from 2015 to 2034) in order to fully realize the net deferred income tax assets discussed above.

Our ability to utilize deferred tax assets may be impacted by certain future events, such as changes in tax legislation, insufficient future taxable income prior to expiration of certain deferred tax assets, annual limits imposed under Section 382 of the Internal Revenue Code (“Section 382”) or by state law, as a result of an “ownership change.” This “ownership change” is defined as a cumulative increase in certain shareholders’ ownership of the Company by more than 50 percentage points during the previous rolling three year period.

The Asbestos PI Trust and TPG collectively sold 5,980,000 shares, 12,057,382 shares, 6,000,000 shares and 3,900,000 shares of the Company’s common shares during the fourth quarter of 2012, the third quarter of 2013, the fourth quarter of 2013, and the first quarter of 2014, respectively. Those sales significantly increase the likelihood that future sales by the Asbestos PI Trust will cause an “ownership change” under Section 382. At this time, we estimate that an additional sale of the Company’s common shares by the Asbestos PI Trust prior to December 2015 would be reasonably likely to cause an “ownership change” under Section 382. An “ownership change” may result in limitations on the utilization of certain tax attributes, primarily our ability to deduct state NOLs against future state taxable income. If such “ownership change” were to occur, then we would be required to record a one-time, non-cash charge in our income statement in the period in which such “ownership change” occurs. We currently estimate that, if such “ownership change” had occurred in the fourth quarter of 2014, based on the factors discussed below, the one-time income tax charge that would have been taken would have reduced our net earnings by an amount between $4.0 million and $8.0 million. This pro forma estimated range of net earnings reduction is based on current management estimates and assumptions that are subject to change over time. The actual amount of the required charge, if any, may differ materially from this current estimate. Key factors impacting the calculation include, but are not limited to, our stock price on the date of the “ownership change”, the applicable tax-exempt interest rate, the tax basis and fair market value of our assets, federal and state tax regulations, projections of future taxable income and prior NOL usage.


	December 31, 2014	December 31, 2013
Deferred income tax assets (liabilities)
Postretirement benefits	$ 87.7	$ 102.7
Pension benefit liabilities	34.0	4.3
Net operating losses	113.7	143.7
Deferred compensation	23.2	25.3
Foreign tax credit carryforwards	12.1	94.4
State tax credit carryforwards	5.9	6.0
Foreign exchange unrealized	13.3	-
Other	41.9	42.7
Total deferred income tax assets	331.8	419.1
Valuation allowances	(87.9)	(109.3)
Net deferred income tax assets	243.9	309.8
Intangibles	(229.1)	(239.3)
Accumulated depreciation	(77.6)	(78.8)
Prepaid pension costs	-	(44.3)
Inventories	(13.4)	(13.8)
Other	(11.0)	(10.3)
Total deferred income tax liabilities	(331.1)	(386.5)
Net deferred income tax liabilities	($87.2)	($76.7)

Deferred income taxes have been classified in the Consolidated Balance Sheet as:
Deferred income tax assets - current	$ 31.4	$ 72.0
Deferred income tax assets - noncurrent	26.6	30.1
Deferred income tax liabilities - current	(0.5)	(0.7)
Deferred income tax liabilities - noncurrent	(144.7)	(178.1)
Net deferred income tax liabilities	($87.2)	($76.7)


	2014	2013	2012
Details of taxes
Earnings (loss) before income taxes:
Domestic	$ 214.9	$ 186.2	$ 188.6
Foreign	($29.7)	$ 12.5	$ 46.0
Total	$ 185.2	$ 198.7	$ 234.6

Income tax expense (benefit):
Current:
Federal	$ 43.0	$ 18.7	$ 24.1
Foreign	7.9	8.1	13.0
State	2.4	3.3	4.4
Total current	53.3	30.1	41.5

Deferred:
Federal	19.0	40.1	27.2
Foreign	0.8	2.3	1.8
State	10.1	(1.1)	5.5
Total deferred	29.9	41.3	34.5

Total income tax expense	$ 83.2	$ 71.4	$ 76.0

We have expanded international operations by constructing a plant in Russia and continue to support our investments in emerging markets.

During 2014, we reviewed our position with regards to foreign unremitted earnings and determined that unremitted earnings would continue to be permanently reinvested. Accordingly we have not recorded U.S. income or foreign withholding taxes on approximately $319.8 million of undistributed earnings of foreign subsidiaries that could be subject to taxation if remitted to the U.S. because we currently plan to keep these amounts permanently invested overseas. It is not practical to calculate the residual income tax which would result if these basis differences reversed due to the complexities of the tax law and the hypothetical nature of the calculations.


	2014	2013	2012
Reconciliation to U.S. statutory tax rate
Continuing operations tax at statutory rate	$ 64.8	$ 69.6	$ 82.1
State income tax expense, net of federal benefit	6.0	5.9	6.2
Increase (decrease) in valuation allowances on deferred domestic income tax assets	3.0	(2.9)	(0.7)
Increase in valuation allowances on deferred foreign income tax assets	24.6	23.0	9.9
Tax on foreign and foreign-source income	(5.7)	(13.8)	(8.2)
Domestic production activities	(5.8)	(9.0)	(2.3)
Permanent book/tax differences	0.8	3.5	1.4
IRS audit settlement	-	-	2.2
Net benefit due to increase in foreign tax credits	-	-	(15.7)
Research and development credits	(4.8)	(4.4)	-
Other	0.3	(0.5)	1.1
Tax expense at effective rate	$ 83.2	$ 71.4	$ 76.0

During 2010 and 2011, we recorded $169.6 million of dividends from our foreign subsidiaries related to unremitted foreign earnings for which we previously recorded a net deferred tax liability as the earnings were not considered permanently reinvested. The receipt of the foreign dividends in 2011 provided an opportunity to elect to credit foreign taxes that were previously deducted. In 2011, we increased the deferred tax assets by $21.1 million offset by a valuation allowance of $15.7 million, for a net tax benefit of $5.4 million to reflect the net impact of the foreign tax credit over the tax deduction for the foreign taxes. In 2012, we released the valuation allowance with respect to the foreign tax credits of $15.7 million.

We recognize the tax benefits of an uncertain tax position only if those benefits are more likely than not to be sustained based on existing tax law. Additionally, we establish a reserve for tax positions that are more likely than not to be sustained based on existing tax law, but uncertain in the ultimate benefit to be sustained upon examination by the relevant taxing authorities. Unrecognized tax benefits are subsequently recognized at the time the more likely than not recognition threshold is met, the tax matter is effectively settled or the statute of limitations for the relevant taxing authority to examine and challenge the tax position has expired, whichever is earlier.

We have $142.6 million of Unrecognized Tax Benefits (“UTB”) as of December 31, 2014, $101.9 million ($99.5 million, net of federal benefit) of this amount, if recognized in future periods, would impact the reported effective tax rate.

It is reasonably possible that certain UTB’s may increase or decrease within the next twelve months due to tax examination changes, settlement activities, expirations of statute of limitations, or the impact on recognition and measurement considerations related to the results of published tax cases or other similar activities. Over the next twelve months we estimate that UTB’s may decrease by $0.6 million related to state statutes expiring and increase by $6.3 million due to uncertain tax positions expected to be taken on domestic tax returns.

We account for all interest and penalties on uncertain income tax positions as income tax expense. We reported $1.5 million of interest and penalty exposure as noncurrent income tax payable in the Consolidated Balance Sheet as of December 31, 2014.

We had the following activity for UTB’s for the years ended December 31, 2014, 2013 and 2012:


	2014	2013	2012
Unrecognized tax benefits balance at January 1,	$ 145.2	$ 138.4	$ 127.2
Gross change for current year positions	10.5	8.5	10.2
Increases for prior period positions	2.9	1.4	7.8
Decrease for prior period positions	(14.1)	(2.1)	(6.1)
Decrease due to settlements and payments	(1.2)	-	-
Decrease due to statute expirations	(0.7)	(1.0)	(0.7)
Unrecognized tax benefits balance at December 31,	$ 142.6	$ 145.2	$ 138.4

We conduct business globally, and as a result, we file income tax returns in the U.S., various states and international jurisdictions. In the normal course of business, we are subject to examination by taxing authorities throughout the world in such major jurisdictions as Australia, Canada, Germany, India, the Netherlands, the United Kingdom and the United States. Generally, we have open tax years subject to tax audit on average of between three years and six years. Our U.S. income tax returns from 2007 to 2009 are currently under review by the IRS. With respect to these years, we have extended the statute of limitations to May 31, 2016. All tax years prior to 2007 have been settled with the IRS. With few exceptions, the statute of limitations is no longer open for state or non-U.S. income tax examinations for the years before 2007. Other than the U.S., we have not significantly extended any open statutes of limitation for any major jurisdiction and have reviewed and accrued for, where necessary, tax liabilities for open periods. The tax years 2007 through 2013 are subject to future potential tax adjustments.


	2014	2013	2012
Other taxes
Payroll taxes	$ 48.0	$ 46.4	$ 44.6
Property, franchise and capital stock taxes	10.9	10.2	11.1