| M. | INCOME TAXES |
The Company’s tax rate is based on income and statutory tax rates in the various jurisdictions in which the Company operates. Tax law requires certain items to be included in the Company’s tax returns at different times than the items reflected in the Company’s financial statements. As a result, the Company’s annual tax rate reflected in its financial statements is different than that reported in its tax returns. Some of these differences are permanent, such as expenses that are not deductible in the Company’s tax return, and some differences reverse over time, such as depreciation expense. These temporary differences create deferred tax assets and liabilities. The Company establishes valuation allowances for its deferred tax assets if, based on the available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The components of the Company’s income before income taxes include the following:
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Year Ended December 31, |
2013 | 2012 | 2011 | |||||||||
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Domestic |
$ | 827.0 | $ | 786.6 | $ | 607.0 | ||||||
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Foreign |
868.0 | 842.3 | 899.9 | |||||||||
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| $ | 1,695.0 | $ | 1,628.9 | $ | 1,506.9 | |||||||
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The components of the Company’s provision for income taxes include the following:
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Year Ended December 31, |
2013 | 2012 | 2011 | |||||||||
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Current provision: |
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Federal |
$ | 191.4 | $ | 126.2 | $ | .4 | ||||||
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State |
20.9 | 31.5 | 20.5 | |||||||||
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Foreign |
214.1 | 207.9 | 219.6 | |||||||||
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| 426.4 | 365.6 | 240.5 | ||||||||||
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Deferred provision: |
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Federal |
68.8 | 134.4 | 207.8 | |||||||||
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State |
18.4 | 9.5 | 3.4 | |||||||||
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Foreign |
10.1 | 7.8 | 12.9 | |||||||||
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| 97.3 | 151.7 | 224.1 | ||||||||||
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| $ | 523.7 | $ | 517.3 | $ | 464.6 | |||||||
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Tax benefits recognized for net operating loss carryforwards were $4.5, $3.2 and $8.1 for the years ended 2013, 2012 and 2011, respectively.
A reconciliation of the statutory U.S. federal tax rate to the effective income tax rate is as follows:
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| 2013 | 2012 | 2011 | ||||||||||
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Statutory rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
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Effect of: |
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Tax on foreign earnings |
(3.8 | ) | (3.1 | ) | (3.3 | ) | ||||||
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Other, net |
(.3 | ) | (.1 | ) | (.9 | ) | ||||||
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| 30.9 | % | 31.8 | % | 30.8 | % | |||||||
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The Company has not provided a deferred tax liability for the temporary differences of approximately $4,400.0 related to the investments in foreign subsidiaries that are considered to be indefinitely reinvested. The amount of the deferred tax liability would be approximately $850.0 as of December 31, 2013.
Included in domestic taxable income for 2013, 2012 and 2011 are $241.7, $256.0 and $311.0 of foreign earnings, respectively, which are not indefinitely reinvested, for which domestic taxes of $19.5, $22.1 and $28.5, respectively, were provided as the difference between the domestic and foreign rate on those earnings.
At December 31, 2013, the Company had net operating loss carryforwards of $474.1, of which $229.6 related to foreign subsidiaries and $244.5 related to states in the U.S. The related deferred tax asset was $78.2. The carryforward periods range from five years to indefinite, subject to certain limitations under applicable laws. The future tax benefits of net operating loss carryforwards are evaluated on a regular basis, including a review of historical and projected operating results.
The tax effects of temporary differences representing deferred tax assets and liabilities are as follows:
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At December 31, |
2013 | 2012 | ||||||
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Assets: |
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Accrued expenses |
$ | 188.4 | $ | 179.9 | ||||
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Postretirement benefit plans |
64.4 | |||||||
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Net operating loss carryforwards |
78.2 | 64.2 | ||||||
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Allowance for losses on receivables |
47.0 | 50.4 | ||||||
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Other |
88.4 | 83.3 | ||||||
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| 402.0 | 442.2 | |||||||
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Valuation allowance |
(43.9 | ) | (21.2 | ) | ||||
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| 358.1 | 421.0 | |||||||
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Liabilities: |
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Financial Services leasing depreciation |
(851.8 | ) | (775.8 | ) | ||||
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Depreciation and amortization |
(296.1 | ) | (241.4 | ) | ||||
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Postretirement benefit plans |
(51.3 | ) | ||||||
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Other |
(5.4 | ) | (14.1 | ) | ||||
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| (1,204.6 | ) | (1,031.3 | ) | |||||
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Net deferred tax liability |
$ | (846.5 | ) | $ | (610.3 | ) | ||
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The balance sheet classification of the Company’s deferred tax assets and liabilities are as follows:
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At December 31, |
2013 | 2012 | ||||||
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Truck, Parts and Other: |
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Other current assets |
$ | 122.2 | $ | 151.2 | ||||
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Other noncurrent assets, net |
33.1 | 40.9 | ||||||
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Accounts payable, accrued expenses and other |
(.6 | ) | (1.7 | ) | ||||
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Other liabilities |
(218.7 | ) | (90.7 | ) | ||||
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Financial Services: |
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Other assets |
77.2 | 72.4 | ||||||
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Deferred taxes and other liabilities |
(859.7 | ) | (782.4 | ) | ||||
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Net deferred tax liability |
$ | (846.5 | ) | $ | (610.3 | ) | ||
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Cash paid for income taxes was $434.0, $448.2 and $284.0 in 2013, 2012 and 2011, respectively.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| 2013 | 2012 | 2011 | ||||||||||
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Balance at January 1 |
$ | 23.4 | $ | 18.3 | $ | 43.1 | ||||||
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Additions for tax positions related to the current year |
1.0 | 1.0 | .9 | |||||||||
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Additions for tax positions related to prior years |
.3 | 9.9 | 5.6 | |||||||||
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Reductions for tax positions related to prior years |
(.7 | ) | (5.2 | ) | (22.9 | ) | ||||||
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Reductions related to settlements |
(9.7 | ) | (.3 | ) | (7.7 | ) | ||||||
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Lapse of statute of limitations |
(1.2 | ) | (.3 | ) | (.7 | ) | ||||||
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Balance at December 31 |
$ | 13.1 | $ | 23.4 | $ | 18.3 | ||||||
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The Company had $13.1 and $23.4 of unrecognized tax benefits, of which $1.5 and $1.9 would impact the effective tax rate, if recognized, as of December 31, 2013, and 2012, respectively.
The Company recognized $1.1 of income, $1.0 of expense and $2.1 of income related to interest and penalties in 2013, 2012 and 2011, respectively. Accrued interest expense and penalties were $5.5 and $6.7 as of December 31, 2013 and 2012, respectively. Interest and penalties are classified as income taxes in the Consolidated Statements of Income.
The Company believes it is reasonably possible that approximately $7 to $8 of unrecognized tax benefits, resulting from intercompany transactions, will be resolved within the next twelve months from Competent Authority negotiations between tax authorities of two jurisdictions; the company does not expect the net impact of these negotiations will be material to its effective tax rate. As of December 31, 2013, the United States Internal Revenue Service has completed examinations of the Company’s tax returns for all years through 2010. The Company’s tax returns for other major jurisdictions remain subject to examination for the years ranging from 2006 through 2013.