12. Taxes on Income

The components of the provision for income taxes attributable to continuing operations for 2013, 2012 and 2011 are as follows:


(in millions)	2013			2012			2011
Current income tax expense:
U.S. federal	$	63.1		$	52.9		$	1.4
Foreign		86.2			67.3			86.4
State and local		9.1			7.7			5.0

Total		158.4			127.9			92.8

Deferred income tax expense (benefit):
U.S. federal		7.9			26.8			55.5
Foreign		(15.8	)		(2.6	)		(25.3	)
State, local and other, net of federal tax benefit		(2.8	)		(4.5	)		2.7

Total		(10.7	)		19.7			32.9

Total income tax provision	$	147.7		$	147.6		$	125.7

The difference between the federal statutory income tax rate and the Company’s reported income tax rate as a percentage of income from operations for 2013, 2012 and 2011 is reconciled as follows:


	2013			2012			2011
Federal statutory tax rate		35.0	%		35.0	%		35.0	%
Increase (decrease) in rates resulting from:
State and local taxes, net		1.2			0.7			1.6
Foreign rate differences		(2.8	)		(2.8	)		(3.1	)
Non-deductible compensation		3.4			0.5			1.0
Foreign earnings not permanently reinvested		1.1			2.3			3.4
Tax settlements and related adjustments		1.0			0.6			—
Goodwill impairment		—			—			3.4
Valuation allowance		1.5			0.4			(2.3	)
Venezuela devaluation and inflationary adjustments and tax exempt income		2.2			(1.6	)		(1.5	)
Foreign dividends		1.3			1.2			1.3
Non-deductible transaction costs		0.5			0.2			—
Other		(2.3	)		1.2			(0.8	)

Reported income tax rate		42.1	%		37.7	%		38.0	%

Foreign pre-tax income was approximately $219, $213, and $250 for 2013, 2012 and 2011, respectively.

Deferred tax assets (liabilities) at December 31, 2013 and 2012 are comprised of the following:


(in millions)	2013			2012
Intangibles	$	(826.9	)	$	(389.4	)
Goodwill		(135.8	)		(121.1	)
Financial reporting amount of a subsidiary in excess of tax basis		(70.4	)		(70.8	)
Foreign earnings not permanently reinvested		(48.4	)		(47.3	)
Property and equipment		(8.8	)		(6.2	)
Other		(0.4	)		(6.5	)

Gross deferred tax liabilities		(1,090.7	)		(641.3	)

Net operating loss		47.8			40.1
Accounts receivable allowances		15.0			12.0
Inventory valuation		58.8			53.8
Pension and postretirement		20.0			35.6
Stock-based compensation		23.6			21.6
Other compensation and benefits		13.0			19.0
Operating reserves		66.3			59.2
Other		13.8			49.1

Gross deferred tax assets		258.3			290.4

Valuation allowance		(34.2	)		(28.1	)

Net deferred tax liability	$	(866.6	)	$	(379.0	)

The Company continually reviews the adequacy of the valuation allowance. A valuation allowance is recorded if, based on the weight of available evidence, it is more likely than not that a deferred tax asset will not be realized. This assessment is based on an evaluation of the level of historical taxable income and projections for future taxable income. During 2013, the Company’s valuation allowance increased by $6.1 principally due to the inability to recognize certain foreign losses for which a valuation allowance was previously provided. During 2012, the Company’s valuation allowance increased by $1.2 principally due to the Company’s inability to recognize the benefit of certain current year foreign losses. During 2011, the Company’s valuation allowance decreased by $8.4 principally due to the ability to recognize certain foreign losses for which a valuation allowance was previously established.

The net operating losses (“NOLs”) reflected on the deferred tax asset table consist of state and foreign net operating loss carryforwards. At December 31, 2013, the Company had net U.S. federal NOLs of approximately $717, none of which are reflected in the consolidated financial statements. In 2013, the Company utilized approximately $91 of these previously unrecognized U.S. federal NOLs in its consolidated financial statements. Additionally, approximately $560 of these U.S. federal NOLs are subject to varying limitations on their use under Section 382 of the Internal Revenue Code of 1986, as amended. Included in the total NOLs reported on the financial statement are $140 of foreign NOLs which the Company has accumulated or acquired through acquisitions. Of the total foreign NOLs, approximately $1 will expire in 2014. Approximately $45 of the foreign NOLs will expire in years subsequent to 2014, and approximately $94 have an unlimited life.

Certain vested and exercised employee equity compensation awards have resulted in tax deductions in excess of previously recorded tax benefits based on the value of such equity compensation awards at the time of grant (“windfalls”). The additional tax benefit associated with the windfalls is not recognized for financial statement purposes until the deduction reduces taxes payable as recorded on the Company’s financial statements with an offset to additional paid-in-capital. Windfall tax benefits of $11.6 and $41.8 were recognized in 2013 and 2012, respectively. All previously unrecognized windfall tax benefits were recognized in 2012.

Generally, the Company intends to indefinitely reinvest undistributed earnings of certain of its foreign subsidiaries outside the U.S. in the future growth of its foreign businesses. As a result, the Company has not provided for U.S. income taxes on undistributed foreign earnings of approximately $1.2 billion at December 31, 2013. Determination of the amount of unrecognized deferred U.S. income liability is not practicable, in part, because of the complexities associated with its hypothetical calculation, which include the impact of complex foreign and domestic tax laws with respect to dividend remittances, remittance requirements imposed by certain of the Company’s debt agreements and the impact of foreign laws restricting such remittances. In 2013, 2012 and 2011, the Company recorded a deferred tax charge (benefit) of $1.4, $2.2 and $7.5, respectively, related to profits that were deemed not to be permanently reinvested outside of the United States.

The following table sets forth the details and the activity related to unrecognized tax benefit as of and for the years ended December 31, 2013 and 2012:


(in millions)	2013			2012
Unrecognized tax benefits, January 1,	$	68.3		$	52.6
Increases (decreases):
Acquisitions		3.5			0.6
Tax positions taken during the current period		27.6			16.3
Tax positions taken during a prior period		(2.7	)		—
Settlements with taxing authorities		(7.7	)		(3.8	)
Other		(0.1	)		1.8

Unrecognized tax benefits, December 31,	$	88.9		$	68.3

During 2013 and 2012, the change in the unrecognized tax benefits primarily relates to tax positions taken during the current period and tax settlements made during the year. At December 31, 2013, the amount of gross unrecognized tax benefits that, if recognized, would affect the reported tax rate is $92.6. The Company has indemnification for $4.8 of the gross unrecognized tax benefit from the sellers of acquired companies.

It is likely that the total amount of unrecognized tax benefits will increase in the next 12 months. Such increase will occur as a result of the Company’s tax return position with respect to the utilization of tax attributes and the conclusion of ongoing tax audits in various jurisdictions around the world. While one or more of these events is reasonably possible to occur within the next 12 months, the Company is not able to accurately estimate the range of the change in the unrecognized tax benefits that will result. The calculation of unrecognized tax benefits involves dealing with uncertainties in the application of complex global tax regulations. Management regularly assesses the Company’s tax positions in light of legislative, bilateral tax treaties, regulatory and judicial developments in the countries in which the Company does business.

The Company conducts business globally and, as a result, the Company or its subsidiaries file income tax returns in the U.S. federal jurisdiction, and in various state, local, and foreign jurisdictions. In the normal course of business, the Company or its subsidiaries are subject to examination by tax authorities throughout the world, including such major jurisdictions as Canada, France, Germany, Hong Kong, Hungary, India, Italy, Japan, Malaysia, Peru and U.S., state and local jurisdictions. As of December 31, 2013, the Company remains subject to examination by federal and state tax authorities for the tax years 2005 to 2012. At December 31, 2013, certain of the Company’s more significant foreign jurisdictions remain subject to examination for various tax years between 2000 and 2012.

The Company classifies all interest expense and penalties on uncertain tax positions as income tax expense. The provision for income taxes for 2013, 2012 and 2011 includes tax-related interest expense of $1.7, $2.4 and $1.1, respectively. As of December 31, 2013 and 2012, the liability for tax-related interest expense was $8.6 and $6.8, respectively.