4. Income Taxes

The components of income before income taxes for the following years ended December 31 consisted of:


	2011		2010		2009
(dollars in millions)
United States	$	425.1	$	455.8	$	481.3
Foreign		85.7		261.9		190.2

	$	510.8	$	717.7	$	671.5

The income tax provision for the following years ended December 31 consisted of:


	2011			2010			2009
(dollars in millions)
Current provision
Federal	$	170.0		$	168.3		$	182.8
Foreign		23.3			31.8			33.6
State		7.8			10.3			8.7

		201.1			210.4			225.1

Deferred (benefit) provision
Federal		(18.9	)		3.7			(13.3	)
Foreign		(2.7	)		(7.2	)		(0.1	)
State		3.3			1.2			(1.6	)

		(18.3	)		(2.3	)		(15.0	)

	$	182.8		$	208.1		$	210.1

Deferred tax assets and deferred tax liabilities at December 31 consisted of:


	2011			2010
(dollars in millions)
Deferred tax assets
Employee benefits	$	168.8		$	158.2
Inventory		19.3			13.8
Receivables and rebates		25.8			24.2
Accrued expenses		30.5			16.6
Loss carryforwards and credits		112.4			73.8

Gross deferred tax assets		356.8			286.6
Valuation allowance		(32.2	)		(36.2	)

		324.6			250.4
Deferred tax liabilities
Intangibles		234.2			111.8
Accelerated depreciation		22.8			25.4
Other		3.2			7.1

		260.2			144.3

	$	64.4		$	106.1

At December 31, 2011, the company had federal net operating loss carryforwards of $206.5 million, which expire between 2013 and 2032, state net operating loss carryforwards of $296.5 million, which expire between 2012 and 2032, and foreign net operating loss carryforwards of $41.8 million, which generally expire between 2012 and 2019. The company also had various tax credits of $8.6 million with an indefinite life and $7.9 million, which expire between 2013 and 2032.

The company records valuation allowances to reduce its deferred tax assets to the amount that it believes is more likely than not to be realized. The company considers future taxable income and the periods over which it must be earned in assessing the need for valuation allowances. In the event the company determines it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to expense in the period such determination was made. At December 31, 2011, the valuation allowance primarily related to state and foreign net operating loss carryforward and credits, and to certain other state deferred tax assets.

A reconciliation between the effective income tax rate and the federal statutory rate for the following years ended December 31 is:


	2011			2010			2009
Federal statutory rate		35	%		35	%		35	%
State taxes, net of federal benefit		2	%		2	%		1	%
Operations taxed at less than U.S. rate		(2	)%		(9	)%		(5	)%
Legal settlement, non-deductible portion		2	%		—	%		—	%
Other, net		(1	)%		1	%		—	%

		36	%		29	%		31	%

The company's foreign tax incentives consist of incentive tax grants in Puerto Rico and Malaysia. The company's grant in Malaysia was entered into on March 1, 2010 and will expire in 2015. The incentive tax grant in Puerto Rico will expire in 2016. The approximate dollar and per share effects of the Puerto Rican and Malaysian tax grants are as follows:


	2011^(A)		2010		2009
(dollars in millions, except per share amounts)
Tax benefit	$	3.7	$	44.6	$	24.0
Per share benefit	$	0.04	$	0.47	$	0.24

(A)	No tax benefit was recognized from the incentive tax grant in Puerto Rico due to the charge for Hernia Product Claims.

A tax benefit from an uncertain tax position may be recognized only if it is more likely than not that the position is sustainable based on its technical merits. The tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with a taxing authority having full knowledge of all relevant information. A reconciliation of the gross amounts of unrecognized tax benefits, excluding interest and penalties, is as follows:


	2011			2010
(dollars in millions)
Balance, January 1	$	53.6		$	53.2
Additions related to prior year tax positions		4.5			2.1
Reductions related to prior year tax positions		(9.0	)		(7.4	)
Additions for tax positions of the current year		8.1			8.9
Settlements		(11.3	)		(0.7	)
Lapse of statutes of limitation		(0.9	)		(2.5	)

Balance, December 31	$	45.0		$	53.6

The company operates in multiple taxing jurisdictions and faces audits from various tax authorities regarding transfer pricing, the deductibility of certain expenses, intercompany transactions and other matters. As of December 31, 2011, the liability for unrecognized tax benefits related to federal, state and foreign taxes was $45.0 million (of which $36.0 million would impact the effective tax rate if recognized), plus $5.0 million of accrued interest. As of December 31, 2010, the liability for unrecognized tax benefits was $53.6 million plus $11.4 million of accrued interest. Interest and penalties associated with uncertain tax positions amounted to a $1.6 million credit in 2011, $0.7 million of expense in 2010, and $2.6 million of expense in 2009.

The company is currently under examination in several tax jurisdictions and remains subject to examination until the statutes of limitation expire for the applicable tax jurisdiction. Within specific countries, the company may be subject to audit by various tax authorities, or subsidiaries operating within the country may be subject to different statutes of limitation expiration dates. As of December 31, 2011, a summary of the tax years that remain subject to examination in the company's major tax jurisdictions are:


United States – federal		2008 and forward
United States – states		2003 and forward
Germany		2006 and forward
Malaysia		2006 and forward
Puerto Rico		2007 and forward
United Kingdom		2010 and forward

In 2011, the company's income tax provision was reduced by $17.6 million as a result of the completion of the U.S Internal Revenue Service examinations for the tax years from 2005 through 2007 and certain examinations in other jurisdictions. Depending upon open tax examinations and/or the expiration of applicable statutes of limitation, the company believes that it is reasonably possible that the total amount of unrecognized tax benefits may decrease by up to $7.3 million within the next 12 months.

At December 31, 2011, the company did not provide for income taxes on the undistributed earnings of its foreign operations of approximately $1.4 billion as it is the company's intention to permanently reinvest these undistributed earnings outside of the United States. Determination of the amount of unrecognized deferred tax liability related to these permanently reinvested earnings is not practicable.