Note 8: Income Taxes
The source of earnings before income taxes and equity earnings consisted of the following:
| (Amounts in millions) | 2013 | 2012 | 2011 | |||||||||
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United States |
$ | 406.7 | $ | 365.2 | $ | 335.5 | ||||||
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Foreign |
119.5 | 95.0 | 77.4 | |||||||||
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Total |
$ | 526.2 | $ | 460.2 | $ | 412.9 | ||||||
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The provision (benefit) for income taxes consisted of the following:
| (Amounts in millions) | 2013 | 2012 | 2011 | |||||||||
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Current: |
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Federal |
$ | 115.5 | $ | 80.3 | $ | 88.4 | ||||||
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Foreign |
27.6 | 26.1 | 26.0 | |||||||||
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State |
14.1 | 12.5 | 14.2 | |||||||||
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Total current |
157.2 | 118.9 | 128.6 | |||||||||
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Deferred: |
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Federal |
6.9 | 32.7 | 8.4 | |||||||||
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Foreign |
2.0 | (8.2) | (0.8) | |||||||||
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State |
0.6 | 4.8 | (2.5) | |||||||||
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Total deferred |
9.5 | 29.3 | 5.1 | |||||||||
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Total income tax provision |
$ | 166.7 | $ | 148.2 | $ | 133.7 | ||||||
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The following is a reconciliation of the statutory federal income tax rate to Snap-on’s effective tax rate:
| 2013 | 2012 | 2011 | ||||||||||
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Statutory federal income tax rate |
35.0% | 35.0% | 35.0% | |||||||||
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Increase (decrease) in tax rate resulting from: |
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State income taxes, net of federal benefit |
2.1 | 2.5 | 2.7 | |||||||||
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Noncontrolling interests |
(0.6) | (0.6) | (0.6) | |||||||||
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Repatriation of foreign earnings |
– | (1.3) | (1.9) | |||||||||
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Change in valuation allowance for deferred tax assets |
0.7 | 1.0 | (0.1) | |||||||||
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Adjustments to tax accruals and reserves |
(1.3) | (1.7) | 0.2 | |||||||||
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Foreign rate differences |
(1.7) | (1.5) | (1.6) | |||||||||
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Domestic production activities deduction |
(2.7) | (1.6) | (0.1) | |||||||||
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Other |
0.2 | 0.4 | (1.2) | |||||||||
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Effective tax rate |
31.7% | 32.2% | 32.4% | |||||||||
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Snap-on’s effective income tax rate on net earnings attributable to Snap-on Incorporated was 32.3% in 2013, 32.8% in 2012, and 33.0% in 2011.
Temporary differences that give rise to the net deferred income tax asset (liability) as of 2013, 2012 and 2011 year end are as follows: |
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| (Amounts in millions) | 2013 | 2012 | 2011 | |||||||||
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Current deferred income tax assets (liabilities): |
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Inventories |
$ | 24.4 | $ | 25.0 | $ | 24.2 | ||||||
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Accruals not currently deductible |
63.2 | 60.4 | 73.4 | |||||||||
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Valuation allowance |
(2.4) | (3.7) | (5.6) | |||||||||
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Total current (included
in deferred income tax |
85.2 | 81.7 | 92.0 | |||||||||
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Long-term deferred income tax assets (liabilities): |
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Employee benefits |
62.5 | 108.1 | 133.9 | |||||||||
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Net operating losses |
59.9 | 59.2 | 52.2 | |||||||||
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Depreciation and amortization |
(180.8) | (161.4) | (150.4) | |||||||||
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Valuation allowance |
(43.0) | (40.2) | (34.8) | |||||||||
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Equity-based compensation |
17.6 | 17.1 | 14.8 | |||||||||
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Other |
(2.9) | 0.4 | 1.4 | |||||||||
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Total long term |
(86.7) | (16.8) | 17.1 | |||||||||
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Net deferred income tax asset (liability) |
$ | (1.5) | $ | 64.9 | $ | 109.1 | ||||||
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As of 2013 year end, Snap-on had tax net operating loss carryforwards totaling $328.6 million as follows:
| (Amounts in millions) | State | United States |
Foreign | Total | ||||||||||||
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Year of expiration: |
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2014-2018 |
$ | – | $ | – | $ | 31.5 | $ | 31.5 | ||||||||
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2019-2023 |
0.1 | – | 1.4 | 1.5 | ||||||||||||
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2024-2028 |
0.1 | – | 36.6 | 36.7 | ||||||||||||
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2029-2033 |
144.3 | – | 15.0 | 159.3 | ||||||||||||
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Indefinite |
– | – | 99.6 | 99.6 | ||||||||||||
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Total net operating loss carryforwards |
$ | 144.5 | $ | – | $ | 184.1 | $ | 328.6 | ||||||||
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A valuation allowance totaling $45.4 million, $43.9 million and $40.4 million as of 2013, 2012 and 2011 year end, respectively, has been established for deferred income tax assets primarily related to certain subsidiary loss carryforwards that may not be realized. Realization of the net deferred income tax assets is dependent on generating sufficient taxable income prior to their expiration. Although realization is not assured, management believes it is more- likely-than-not that the net deferred income tax assets will be realized. The amount of the net deferred income tax assets considered realizable, however, could change in the near term if estimates of future taxable income during the carryforward period fluctuate.
The following is a reconciliation of the beginning and ending amounts of unrecognized tax benefits for 2013, 2012 and 2011:
| (Amounts in millions) | 2013 | 2012 | 2011 | |||||||||
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Unrecognized tax benefits at beginning of year |
$ | 6.8 | $ | 11.0 | $ | 11.1 | ||||||
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Gross increases – tax positions in prior periods |
1.5 | 0.7 | 0.5 | |||||||||
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Gross decreases – tax positions in prior periods |
(1.6) | (4.9) | (0.4) | |||||||||
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Gross increases – tax positions in the current period |
0.5 | 1.2 | 2.8 | |||||||||
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Settlements with taxing authorities |
(2.1) | – | (1.2) | |||||||||
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Lapsing of statutes of limitations |
(0.5) | (1.2) | (1.8) | |||||||||
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Unrecognized tax benefits at end of year |
$ | 4.6 | $ | 6.8 | $ | 11.0 | ||||||
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Of the $4.6 million, $6.8 million and $11.0 million of unrecognized tax benefits as of 2013, 2012 and 2011 year end, respectively, approximately $4.6 million, $4.1 million and $9.1 million, respectively, would impact the effective income tax rate if recognized.
Interest and penalties related to unrecognized tax benefits are recorded in income tax expense. During 2013 and 2012, the company reversed a net $0.6 million and $0.5 million, respectively, of interest and penalties to income associated with unrecognized tax benefits. As of 2013, 2012 and 2011 year end, the company has provided for $0.9 million, $1.6 million and $1.6 million, respectively, of accrued interest and penalties related to unrecognized tax benefits. The unrecognized tax benefits and related accrued interest and penalties are included in “Other long-term liabilities” on the accompanying Consolidated Balance Sheets.
Snap-on and its subsidiaries file income tax returns in the United States and in various state, local and foreign jurisdictions. It is reasonably possible that certain unrecognized tax benefits may either be settled with taxing authorities or the statutes of limitations for such items may lapse within the next 12 months, causing Snap-on’s gross unrecognized tax benefits to decrease by a range of zero to $1.1 million. Over the next 12 months, Snap-on anticipates taking certain tax positions on various tax returns for which the related tax benefit does not meet the recognition threshold. Accordingly, Snap-on’s gross unrecognized tax benefits may increase by a range of zero to $0.8 million over the next 12 months for uncertain tax positions expected to be taken in future tax filings.
With few exceptions, Snap-on is no longer subject to U.S. federal and state/local income tax examinations by tax authorities for years prior to 2008, and Snap-on is no longer subject to non-U.S. income tax examinations by tax authorities for years prior to 2006.
The undistributed earnings of all non-U.S. subsidiaries totaled $556.0 million, $492.2 million and $416.4 million as of 2013, 2012 and 2011 year end, respectively. Snap-on has not provided any deferred taxes on these undistributed earnings as it considers the undistributed earnings to be permanently invested. Determination of the amount of unrecognized deferred income tax liability related to these earnings is not practicable.