Income Taxes

Pre-tax income (loss) from continuing operations was taxed in the following jurisdictions (in millions):



	Fiscal Year Ended September 30,
	2012		2011		2010
Domestic	$	246.6	$	420.8	$	1,273.2
Foreign	40.1		2.8		(31.5		)
	$	286.7	$	423.6	$	1,241.7

Significant components of the provision for income taxes were as follows (in millions):



	Fiscal Year Ended September 30,
	2012			2011			2010
Allocated to Income From Continuing Operations Before Equity in Earnings (Losses) of Unconsolidated Affiliates
Current:
Federal	$	110.1		$	150.5		$	468.3
Foreign	3.2			0.7			7.4
State	4.2			3.7			14.0
Total current	117.5			154.9			489.7
Deferred:
Federal	(59.9		)	(14.2		)	(57.6		)
Foreign	2.0			4.8			(9.0		)
State	(2.2		)	(0.4		)	(1.7		)
Total deferred	(60.1		)	(9.8		)	(68.3		)
	$	57.4		$	145.1		$	421.4

Allocated to Other Comprehensive Income (Loss)
Deferred federal, state and foreign	$	18.7		$	(14.5	)	$	10.5

The reconciliation of income tax computed at the U.S. federal statutory tax rates to income tax expense was:



	Fiscal Year Ended September 30,
	2012		2011		2010
Effective Rate Reconciliation
U.S. federal tax rate	35.0	%	35.0	%	35.0	%
Non-deductible intangible asset impairment charges	—		0.1		—
State income taxes, net	(0.6	)	0.8		1.0
Foreign taxes	2.4		(0.6	)	(0.1	)
Tax audit settlements	(4.1	)	—		(1.2	)
European tax incentive	(1.7	)	(0.9	)	0.6
Valuation allowance	(2.5	)	1.3		0.3
Domestic tax credits	(0.3	)	(1.5	)	(0.1	)
Manufacturing deduction	(3.6	)	(1.1	)	(1.9	)
Other, net	(4.6	)	1.2		0.3
	20.0	%	34.3	%	33.9	%

During fiscal 2012, the Company recorded discrete tax benefits of $44.8 million which included settlement of audits, changes in filing positions taken in prior periods, expiration of statute of limitations and utilization of losses previously unbenefitted. Other, net for fiscal 2012 included $13.1 million for adjustments related to deferred taxes and changes to filing positions taken in prior periods. In fiscal 2011, the Company recorded a $2.7 million benefit due to the reinstatement of the U.S. research & development tax credit for periods prior to fiscal 2011. The fiscal 2010 research & development tax credit included only one-fourth of the annual benefit because of the timing of the credit reinstatement. During fiscal 2010, the Company settled a number of income tax audits.

The Company is party to a tax incentive agreement (“incentive”) covering certain of its European operations. The incentive provides for a reduction in the Company’s effective income tax rate through allowable deductions that are subject to recapture to the extent that certain conditions are not met, including a requirement to have minimum cumulative operating income over a multiple-year period ending in fiscal 2013. The Company recorded tax deductions (income recapture) under the incentive of €11.5 million, €7.8 million and €(15.9) million in fiscal 2012, 2011 and 2010, respectively, which resulted in additional benefit (expense) of $5.0 million, $3.7 million and $(7.3) million in fiscal 2012, 2011 and 2010, respectively. Life-to-date, the Company has recorded €21.5 million of cumulative net deductions which are subject to recapture provisions should certain minimum income and other requirements not be met. Should the Company reach the maximum level of cumulative operating income under the incentive, aggregate additional unbenefitted deductions of €92.0 million would be available to offset the Company’s future taxable income, although the amount of deductions allowed in any particular tax year are limited by the incentive.

In fiscal 2009, 2010 and 2012, the Company sold several European companies whose operations were subsequently classified as discontinued operations. The Company had made an election with the U.S. Internal Revenue Service to treat Windmill Ventures, the Company’s European holding company parent of these disposed companies, as a disregarded entity for U.S. federal income tax purposes. As a result of this election, the Company recorded a worthless stock/bad debt income tax benefit related to the discontinued operations of the sold companies. In fiscal 2012, the Company settled an income tax audit, which resulted in a tax benefit of $6.1 million related to the release of previously accrued amounts for uncertain tax positions for worthless stock/bad debt deductions, which was included in discontinued operations.

Deferred income tax assets and liabilities were comprised of the following (in millions):



	September 30,
	2012			2011
Deferred Tax Assets and Liabilities
Deferred tax assets:
Other long-term liabilities	$	105.1		$	112.6
Losses and credits	78.2			57.4
Accrued warranty	30.4			23.8
Other current liabilities	32.4			20.8
Payroll-related obligations	20.1			15.7
Receivables	7.2			15.2
Other	0.1			0.4
Gross deferred tax assets	273.5			245.9
Less valuation allowance	(55.0		)	(39.5		)
Deferred tax assets	218.5			206.4
Deferred tax liabilities:
Intangible assets	223.8			241.2
Investment in unconsolidated partnership	—			5.3
Property, plant and equipment	34.2			48.8
Inventories	16.4			2.7
Other	3.8			6.8
Deferred tax liabilities	278.2			304.8
Net deferred tax liability	$	(59.7	)	$	(98.4	)

The net deferred tax liability is classified in the Consolidated Balance Sheets as follows (in millions):



	September 30,
	2012			2011
Current net deferred tax asset	$	69.9		$	72.9
Non-current net deferred tax liability	(129.6		)	(171.3		)
	$	(59.7	)	$	(98.4	)

As of September 30, 2012, the Company had $191.1 million of net operating loss carryforwards available to reduce future taxable income of certain foreign subsidiaries that are primarily from countries with carryforward periods ranging from five years to an unlimited period. In addition, the Company had $157.0 million of state net operating loss carryforwards, which are subject to expiration from 2014 to 2032. The Company also had capital loss carryforwards of $32.4 million, which are subject to expiration from 2014 to 2017, and state credit carryforwards of $8.3 million, which are subject to expiration from 2022 to 2027. The deferred tax assets for foreign net operating loss carryforwards, state net operating loss carryforwards, capital loss carryforwards and state credit carryforwards were $54.0 million, $8.2 million, $11.9 million and $4.1 million, respectively, and are reviewed for recoverability based on historical taxable income, the expected reversals of existing temporary differences, tax-planning strategies and projections of future taxable income. As a result of this analysis, the Company carried a valuation allowance as of September 30, 2012 against the foreign deferred tax assets, state deferred tax assets and capital loss carryforwards of $40.6 million, $2.5 million and $11.9 million, respectively.

The Company does not provide for U.S. income taxes on undistributed earnings of its foreign operations that are intended to be permanently reinvested. At September 30, 2012, these earnings amounted to $50.6 million. If these earnings were repatriated to the United States, the Company would be required to accrue and pay U.S. federal income taxes and foreign withholding taxes, as adjusted for foreign tax credits. Determination of the amount of any unrecognized deferred income tax liability on these earnings is not practicable.

As of September 30, 2012, the Company’s liability for gross unrecognized tax benefits, excluding related interest and penalties, was $33.9 million. As of September 30, 2012, net unrecognized tax benefits, excluding interest and penalties, of $23.8 million would affect the Company’s net income if recognized, including $23.1 million which would impact net income from continuing operations. As of September 30, 2011, net unrecognized tax benefits, excluding interest and penalties, of $43.4 million would have affected the Company’s net income if recognized, $23.3 million of which would have impacted net income from continuing operations. A reconciliation of the beginning and ending amount of unrecognized tax benefits during fiscal 2012 and fiscal 2011 were as follows (in millions):



	Fiscal Year Ended September 30,
	2012			2011
Balance at beginning of year	$	53.3		$	52.1
Additions for tax positions related to current year	3.8			4.0
Additions for tax positions related to prior years	8.7			4.0
Reductions for tax positions of prior years	(0.2		)	(0.3		)
Settlements	(28.3		)	(2.0		)
Lapse of statute of limitations	(4.4		)	(4.5		)
Balance at end of year	$	32.9		$	53.3

The Company recognizes accrued interest and penalties, if any, related to unrecognized tax benefits in the “Provision for income taxes” in the Consolidated Statements of Income. During the fiscal years ended September 30, 2012, 2011 and 2010, the Company recognized tax benefits of $0.8 million, $1.7 million and $0.9 million related to interest and penalties, respectively. At September 30, 2012 and 2011, the Company had accruals for the payment of interest and penalties of $13.3 million and $14.1 million, respectively. During the next twelve months, it is reasonably possible that federal, state and foreign tax audit resolutions could reduce unrecognized tax benefits by approximately $4.0 million, either because the Company’s tax positions are sustained on audit, because the Company agrees to their disallowance or the statute of limitations closes.

The Company files federal income tax returns, as well as multiple state, local and non-U.S. jurisdiction tax returns. The Company is regularly audited by federal, state and foreign tax authorities. During fiscal 2012, the U.S. Internal Revenue Service completed its audit of the Company for the taxable years ended September 30, 2008 and 2009. As of September 30, 2012, tax years open for examination under applicable statutes were as follows:



Tax Jurisdiction		Open Tax Years
Australia		2007 - 2012
Belgium		2010 - 2012
Brazil		2006 - 2012
Canada		2009 - 2012
Romania		2010 - 2012
The Netherlands		2007 - 2012
United States (federal)		2010 - 2012
United States (state and local)		2002 - 2012