Income Taxes
Earnings before income taxes and discontinued operations are:
|
| | | | | | | | | | | |
(in millions) | 2013 | | 2012 | | 2011 |
U.S. Operations | $ | 651 |
| | $ | 1,514 |
| | $ | 1,299 |
|
Non-U.S. Operations | 237 |
| | 184 |
| | 219 |
|
Earnings before income taxes and discontinued operations | $ | 888 |
| | $ | 1,698 |
| | $ | 1,518 |
|
The provision for income taxes from continuing operations consists of the following:
|
| | | | | | | | | | | |
(in millions) | 2013 | | 2012 | | 2011 |
Current: | | | | | |
Federal | $ | 451 |
| | $ | 430 |
| | $ | 387 |
|
State and local | 62 |
| | 27 |
| | 20 |
|
Non-U.S. | 19 |
| | 13 |
| | 17 |
|
Total current | $ | 532 |
| | $ | 470 |
| | $ | 424 |
|
| | | | | |
Deferred: | | | | | |
Federal | $ | 28 |
| | $ | 124 |
| | $ | 92 |
|
State and local | (5 | ) | | 28 |
| | 29 |
|
Non-U.S. | (2 | ) | | 6 |
| | 7 |
|
Total deferred | 21 |
| | 158 |
| | 128 |
|
Provision for income taxes | $ | 553 |
| | $ | 628 |
| | $ | 552 |
|
The following table presents a reconciliation of the provision based on the federal statutory income tax rate to our effective income tax rate from continuing operations:
|
| | | | | | | | |
| 2013 | | 2012 | | 2011 |
Provision at Federal statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
State and local income taxes, net of federal benefit | 2.5 |
| | 2.3 |
| | 2.6 |
|
Foreign tax rate differential | (4.0 | ) | | (2.2 | ) | | (3.1 | ) |
Nondeductible/nontaxable items | (0.5 | ) | | — |
| | 0.6 |
|
Nondeductible goodwill impairment | 33.2 |
| | — |
| | — |
|
Change in measurement of an uncertain tax position and impact of IRS settlements | (5.7 | ) | | 0.9 |
| | 2.4 |
|
Other | 1.8 |
| | 1.0 |
| | (1.1 | ) |
Effective income tax rate | 62.3 | % | | 37.0 | % | | 36.4 | % |
The fiscal 2013 effective tax rate was unfavorably impacted by 33.2 percentage points ($295 million) due to the nondeductibility of substantially all of the goodwill impairment which was partially offset by the favorable impact of the revaluation of our deferred tax liability and related interest on unrepatriated foreign earnings as a result of an agreement with tax authorities ($64 million or 7.2 percentage points). During the fourth quarter of fiscal 2013, we recorded an out-of-period increase in income tax expense of $14 million (of which generally less than $1 million pertained to each of the first three quarters of fiscal 2013 and each of the quarters in fiscal 2012 through 2008), which related to uncertain tax benefits, and a decrease in retained earnings of $15 million, which related to the adoption of accounting guidance for uncertain tax benefits in 2008. The amounts were not material individually or in the aggregate to current or prior periods.
At June 30, 2013, we had $1.8 billion of undistributed earnings from non-U.S. subsidiaries that are intended to be permanently reinvested in non-U.S. operations. Because these earnings are considered permanently reinvested, no U.S. tax provision has been accrued related to the repatriation of these earnings. It is not practicable to estimate the amount of U.S. tax that might be payable on the eventual remittance of such earnings.
Deferred income taxes arise from temporary differences between financial reporting and tax reporting bases of assets and liabilities and operating loss and tax credit carryforwards for tax purposes. The following table presents the components of the deferred income tax assets and liabilities at June 30:
|
| | | | | | | |
(in millions) | 2013 | | 2012 |
Deferred income tax assets: | | | |
Receivable basis difference | $ | 50 |
| | $ | 46 |
|
Accrued liabilities | 115 |
| | 107 |
|
Share-based compensation | 66 |
| | 90 |
|
Loss and tax credit carryforwards | 158 |
| | 120 |
|
Deferred tax assets related to uncertain tax positions | 127 |
| | 118 |
|
Other | 82 |
| | 85 |
|
Total deferred income tax assets | 598 |
| | 566 |
|
Valuation allowance for deferred income tax assets | (88 | ) | | (86 | ) |
Net deferred income tax assets | $ | 510 |
| | $ | 480 |
|
| | | |
Deferred income tax liabilities: | | | |
Inventory basis differences | $ | (1,160 | ) | | $ | (1,067 | ) |
Property-related | (173 | ) | | (180 | ) |
Goodwill and other intangibles | (299 | ) | | (146 | ) |
Unremitted foreign earnings | — |
| | (64 | ) |
Other | (6 | ) | | (5 | ) |
Total deferred income tax liabilities | (1,638 | ) | | (1,462 | ) |
Net deferred income tax liability | $ | (1,128 | ) | | $ | (982 | ) |
Deferred income tax assets and liabilities in the preceding table, after netting by taxing jurisdiction, are in the following captions in the consolidated balance sheets at June 30:
|
| | | | | | | |
(in millions) | 2013 | | 2012 |
Current deferred income tax asset (1) | $ | 15 |
| | $ | 27 |
|
Noncurrent deferred income tax asset (2) | 17 |
| | 6 |
|
Current deferred income tax liability (3) | (908 | ) | | (858 | ) |
Noncurrent deferred income tax liability (4) | (252 | ) | | (157 | ) |
Net deferred income tax liability | $ | (1,128 | ) | | $ | (982 | ) |
| |
(1) | Included in prepaid expenses and other in the consolidated balance sheets. |
| |
(2) | Included in other assets in the consolidated balance sheets. |
| |
(3) | Included in other accrued liabilities in the consolidated balance sheets. |
| |
(4) | Included in deferred income taxes and other liabilities in the consolidated balance sheets. |
At June 30, 2013, we had gross federal, state and international loss and credit carryforwards of $146 million, $693 million and $114 million, respectively, the tax effect of which is an aggregate deferred tax asset of $158 million. Substantially all of these carryforwards are available for at least three years. Approximately $76 million of the valuation allowance at June 30, 2013 applies to certain federal, state and international loss carryforwards that, in our opinion, are more likely than not to expire unutilized. However, to the extent that tax benefits related to these carryforwards are realized in the future, the reduction in the valuation allowance would reduce income tax expense.
We had $650 million, $654 million and $747 million of unrecognized tax benefits at June 30, 2013, 2012 and 2011, respectively. The June 30, 2013, 2012 and 2011 balances include $371 million, $337 million and $332 million, respectively, of unrecognized tax benefits that, if recognized, would have an impact on the effective tax rate. The remaining unrecognized tax benefits relate to tax positions for which ultimate deductibility is highly certain but for which there is uncertainty as to the timing of such deductibility. Recognition of these tax benefits would not affect our effective tax rate. We include the full amount of unrecognized tax benefits in deferred income taxes and other liabilities in the consolidated balance sheets. The following table presents a reconciliation of the beginning and ending amounts of unrecognized tax benefits:
|
| | | | | | | | | | | |
(in millions) | 2013 | | 2012 | | 2011 |
Balance at beginning of fiscal year | $ | 654 |
| | $ | 747 |
| | $ | 731 |
|
Additions for tax positions of the current year | 22 |
| | 16 |
| | 16 |
|
Additions for tax positions of prior years | 97 |
| | 68 |
| | 58 |
|
Reductions for tax positions of prior years | (30 | ) | | (3 | ) | | (20 | ) |
Settlements with tax authorities | (93 | ) | | (172 | ) | | (36 | ) |
Expiration of the statute of limitations | — |
| | (2 | ) | | (2 | ) |
Balance at end of fiscal year | $ | 650 |
| | $ | 654 |
| | $ | 747 |
|
It is reasonably possible that there could be a change in the amount of unrecognized tax benefits within the next 12 months due to activities of the Internal Revenue Service ("IRS") or other taxing authorities, including proposed assessments of additional tax, possible settlement of audit issues (primarily IRS audit settlements for various fiscal years), reassessment of existing unrecognized tax benefits or the expiration of applicable statutes of limitations. We estimate that the range of the possible change in unrecognized tax benefits within the next 12 months is a net decrease of approximately zero to $335 million, exclusive of penalties and interest.
We recognize accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes. At June 30, 2013, 2012 and 2011 we had $198 million, $209 million and $267 million, respectively, accrued for the payment of interest and penalties. These balances are gross amounts before any tax benefits and are included in deferred income taxes and other liabilities in the consolidated balance sheets. During fiscal 2013 and 2011, we recognized $24 million and $36 million of interest and penalties in income tax expense, respectively. During fiscal 2012, we recognized $28 million of benefit for interest and penalties in income tax expense.
We file income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and various foreign jurisdictions. With few exceptions, we are subject to audit by taxing authorities for fiscal years 2003 through the current fiscal year.
The IRS is currently conducting audits of fiscal years 2003 through 2010. We have received proposed adjustments from the IRS for fiscal years 2003 through 2007 related to our transfer pricing arrangements between foreign and domestic subsidiaries. The IRS has proposed additional taxes of $399 million, excluding penalties and interest. If this tax ultimately must be paid, CareFusion is liable under the tax matters agreement entered into in connection with the CareFusion Spin-Off for $142 million of the total amount. We disagree with these proposed adjustments, which we are contesting, and have accounted for the unrecognized tax benefits related to them. The IRS had also proposed additional taxes of $450 million, excluding penalties and interest, related to the transfer of intellectual property among subsidiaries of an acquired entity prior to its acquisition by us, for which CareFusion would be liable under the tax matters agreement. During the fourth quarter of fiscal 2013, CareFusion settled this matter with the IRS. We have adjusted the indemnification receivable and corresponding unrecognized tax benefit that we had recorded for this matter. The settlement has no net impact on our provision for income taxes.
