INCOME TAXES

12 Months Ended

Dec. 31, 2023

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

The Company is responsible for filing consolidated U.S. federal, foreign and combined, unitary or separate state income tax returns. The Company is responsible for paying the taxes relating to such returns, including any subsequent adjustments resulting from the redetermination of such tax liabilities by the applicable taxing authorities.

The components of the income before income taxes for the Company’s domestic and foreign operations for the years ended December 31 are provided below:

	For the year ended December 31,
In millions	2023		2022		2021
Domestic	$	506	$	372	$	253
Foreign	586		482		484
Income before income taxes	$	1,092	$	854	$	737

The consolidated provision for income taxes included in the Consolidated Statements of Income consisted of the following:

	For the year ended December 31,
In millions	2023		2022		2021
Current tax expense (benefit)
Federal	$	148	$	37	$	(81)
State	29		3		27
Foreign	148		137		138
	325		177		84
Deferred tax (benefit) expense
Federal	(50)		29		87
State	1		—		10
Foreign	(9)		7		(9)
	(58)		36		88
Total provision	$	267	$	213	$	172

A reconciliation of the United States federal statutory income tax rate to the effective income tax rate on operations for the years ended December 31 is provided below:

	For the year ended December 31,
In millions	2023		2022		2021
U.S. federal statutory rate	21.0	%	21.0	%	21.0	%
State taxes	1.5		2.0		0.3
Foreign	2.0		3.8		3.3
Research and development credit	(0.6)		(0.8)		(0.8)
Non-taxable gain on acquisition	(0.8)		—		—
U.S. net operating loss carryback	—		—		(3.4)
Changes in valuation allowances	1.0		(2.0)		3.0
U.S. tax reform provision	0.6		0.1		0.7
Other, net	(0.2)		0.9		(0.9)
Effective rate	24.5	%	25.0	%	23.2	%

The decrease in effective tax rate from 2022 to 2023 was primarily due to a change in mix of foreign earnings, changes in valuation allowances, and the non-taxable gain generated on the acquisition of LKZ.

The increase in effective tax rate from 2021 to 2022 was primarily due to the absence of benefit from amended federal and state income tax returns that were filed in 2021 and higher foreign taxes, partially offset by the change in valuation allowance.

On August 16, 2022, the Inflation Reduction Act of 2022 was signed into law. This act includes a new book minimum tax on certain large corporations and an excise tax on corporate stock buybacks among other provisions. At this time, the Company does not believe the act will have a material impact on our consolidated financial position, results of operations, or cash flows.

Components of deferred tax assets and liabilities were as follows:

	December 31,
In millions	2023		2022
Deferred income tax assets:
Accrued expenses and reserves	$	50	$	39
Warranty reserve	49		49
Deferred compensation/employee benefits	77		61
Right-of-use assets	78		74
Pension and postretirement obligations	16		19
Inventory	49		49
Deferred revenue	84		52
Net operating loss carry forwards	124		102
Other	51		37
Gross deferred income tax assets	578		482
Less: Valuation allowance	(58)		(46)
Total deferred income tax assets	520		436
Deferred income tax liabilities:
Property, plant & equipment	64		78
Right-of-use liabilities	75		72
Intangible assets	610		542
Total deferred income tax liabilities	749		692
Net deferred income tax liability	$	229	$	256

A valuation allowance is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of December 31, 2023, the valuation allowance for certain deferred tax asset carryforwards was $58 million, primarily in the United States, South Africa, China, the Netherlands, and Denmark. The increase in valuation allowances in 2023 is primarily related to state net operating loss carry-forwards that are not expected to be realized.

The Company has net operating loss carry-forwards in the amount of $430 million, of which $228 million are indefinite lived, $90 million expire within ten years and $112 million expire in various periods between December 31, 2034 to December 31, 2043.

As of December 31, 2023, the liability for income taxes associated with unrecognized tax benefits was $40 million, of which $27 million, if recognized, would favorably affect the Company’s effective income tax rate. As of December 31, 2022, the liability for income taxes associated with unrecognized tax benefits was $33 million, of which $20 million, if recognized, would favorably affect the Company’s effective income tax rate. A reconciliation of the beginning and ending amount of the gross liability for income taxes associated with unrecognized tax benefits follows:

In millions	2023		2022		2021
Balance at beginning of year	$	33	$	32	$	16
Unrecognized tax benefits in prior periods	13		1		19
Audit settlement during year	(5)		—		(1)
Expiration of audit statute of limitations	(1)		—		(2)
Balance at end of year	$	40	$	33	$	32

The Company includes interest and penalties related to unrecognized tax benefits in income tax expense. As of December 31, 2023 and 2022, the total interest and penalties accrued was approximately $13 million and $5 million, respectively.

An audit of Company’s U.S. federal income tax returns for years 2017-2019 is ongoing and select state and non-U.S. income tax audits are also underway. With limited exception, the Company is no longer subject to examination by various U.S. and foreign taxing authorities for years before 2018. At this time, the Company believes that it is reasonably possible that unrecognized tax benefits of approximately $17 million may change within the next 12 months due to the expiration of statutory review periods and current examinations.