Cleveland-Cliffs Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

INCOME TAXES

INCOME TAXES

12 Months Ended

Dec. 31, 2013

NOTE 15 - INCOME TAXES

Income (Loss) from Continuing Operations Before Income Taxes and Equity Income (Loss) from Ventures includes the following components:



	(In Millions)
	2013			2012			2011
United States	$	837.7		$	838.6		$	1,506.5
Foreign	(348.4		)	(1,340.4		)	684.0
	$	489.3		$	(501.8	)	$	2,190.5

The components of the provision (benefit) for income taxes on continuing operations consist of the following:



	(In Millions)
	2013			2012			2011
Current provision (benefit):
United States federal	$	101.3		$	71.1		$	246.8
United States state & local	4.0			7.6			2.8
Foreign	87.9			50.2			224.7
	193.2			128.9			474.3
Deferred provision (benefit):
United States federal	23.3			221.2			23.8
United States state & local	3.0			1.4			4.7
Foreign	(164.4		)	(95.6		)	(95.1		)
	(138.1		)	127.0			(66.6		)
Total provision on income (loss) from continuing operations	$	55.1		$	255.9		$	407.7

Reconciliation of our income tax attributable to continuing operations computed at the U.S. federal statutory rate is as follows:



	(In Millions)
	2013					2012					2011
Tax at U.S. statutory rate of 35 percent	$	171.3		35.0	%	$	(175.6	)	35.0	%	$	766.7		35.0	%
Increase (decrease) due to:
Foreign exchange remeasurement	(2.6		)	(0.5	)	62.3			(12.4	)	(62.6		)	(2.9	)
Non-taxable income related to noncontrolling interests	(1.5		)	(0.3	)	61.0			(12.0	)	(63.6		)	(2.9	)
Impact of tax law change	—			—		(357.1		)	71.2		—			—
Percentage depletion in excess of cost depletion	(97.6		)	(19.9	)	(109.1		)	21.7		(153.4		)	(7.0	)
Impact of foreign operations	(10.2		)	(2.1	)	65.2			(13.0	)	(44.0		)	(2.0	)
Income not subject to tax	(106.6		)	(21.8	)	(108.0		)	21.5		(67.5		)	(3.1	)
Goodwill impairment	20.5			4.2		202.2			(40.3	)	—			—
Non-taxable hedging income	—			—		—			—		(32.4		)	(1.5	)
State taxes, net	5.6			1.1		7.3			(1.5	)	7.5			0.3
Manufacturer’s deduction	(7.9		)	(1.6	)	(4.7		)	0.9		(11.9		)	(0.5	)
Valuation allowance	73.0			14.9		634.5			(126.5	)	49.5			2.3
Tax uncertainties	19.6			5.3		(14.8		)	2.9		17.7			0.8
Prior year adjustment in current year	(11.4		)	(3.6	)	(5.7		)	1.1		(18.0		)	(0.8	)
Other items — net	2.9			0.6		(1.6		)	0.4		19.7			0.9
Income tax expense	$	55.1		11.3	%	$	255.9		(51.0	)%	$	407.7		18.6	%

The components of income taxes for other than continuing operations consisted of the following:



	(In Millions)
	2013			2012			2011
Other comprehensive (income) loss:
Pension/OPEB liability	$	100.0		$	13.8		$	(60.2	)
Mark-to-market adjustments	2.0			1.7			(17.7		)
Other	(12.4		)	2.6			—
Total	$	89.6		$	18.1		$	(77.9	)

Paid in capital — acquisition of noncontrolling interest	$	102.1		$	—		$	—
Paid in capital — stock based compensation	$	3.5		$	(12.8	)	$	(4.6	)
Discontinued Operations	$	(2.0	)	$	10.4		$	3.2

Significant components of our deferred tax assets and liabilities as of December 31, 2013 and 2012 are as follows:



	(In Millions)
	2013			2012
Deferred tax assets:
Pensions	$	88.4		$	161.2
MRRT starting base allowance	300.3			357.1
Postretirement benefits other than pensions	58.0			87.7
Alternative minimum tax credit carryforwards	299.2			274.9
Investment in ventures	—			14.1
Asset retirement obligations	61.7			48.2
Operating loss carryforwards	524.4			396.4
Product inventories	16.4			45.4
Property, plant and equipment and mineral rights	56.0			49.2
Lease liabilities	31.9			31.0
Other liabilities	138.3			140.9
Total deferred tax assets before valuation allowance	1,574.6			1,606.1
Deferred tax asset valuation allowance	864.1			858.4
Net deferred tax assets	710.5			747.7
Deferred tax liabilities:
Property, plant and equipment and mineral rights	1,400.8			1,350.5
Investment in ventures	196.4			207.6
Intangible assets	33.5			24.6
Income tax uncertainties	48.5			48.5
Financial derivatives	—			1.6
Product inventories	12.8			19.6
Other assets	93.0			101.9
Total deferred tax liabilities	1,785.0			1,754.3
Net deferred tax (liabilities) assets	$	(1,074.5	)	$	(1,006.6	)

The deferred tax amounts are classified in the Statements of Consolidated Financial Position as current or long-term consistently with the underlying asset or liability that generates the basis difference between financial reporting and tax. Following is a summary:



	(In Millions)
	2013			2012
Deferred tax assets:
United States	$	7.2		$	5.2
Foreign
Current	29.4			3.8
Long-term	41.5			151.5
Total deferred tax assets	78.1			160.5
Deferred tax liabilities:
United States	175.3			58.4
Foreign
Current	6.1			—
Long-term	971.2			1,108.7
Total deferred tax liabilities	1,152.6			1,167.1
Net deferred tax (liabilities)	$	(1,074.5	)	$	(1,006.6	)

At December 31, 2013 and 2012, we had $299.2 million and $274.9 million, respectively, of gross deferred tax assets related to U.S. alternative minimum tax credits that can be carried forward indefinitely.

We had gross state and foreign net operating loss carryforwards of $157.9 million, and $3.5 billion, respectively, at December 31, 2013. We had gross state and foreign net operating loss carryforwards at December 31, 2012 of, $185.0 million and $2.1 billion, respectively. State net operating losses will begin to expire in 2022, and the foreign net operating losses will begin to expire in 2015. We had foreign tax credit carryforwards of $5.8 million at December 31, 2013 and December 31, 2012. The foreign tax credit carryforwards will begin to expire in 2020.

We recorded a $102.1 million net increase to the deferred tax liabilities related to the acquisition of noncontrolling interest in Bloom Lake.

We recorded a $5.7 million net increase in the valuation allowance of certain deferred tax assets where management believes that realization of the related deferred tax assets is not more likely than not. Of this amount, a $40.9 million increase relates to ordinary losses of certain foreign and state operations for which future utilization is currently uncertain, a $6.9 million increase relates to certain foreign assets where tax basis exceeds book basis, a $13.5 million decrease relates to the reversal of our valuation allowance on MRRT tax credits which are expected to be realized based on future projected taxable income, and a $24.4 million increase relates to management's conclusion that it was more likely than not that the deferred tax asset related to the Alternative Minimum Tax credit would not be utilized. The Australian valuation allowance decreased by $65.5 million as a result of the change in foreign exchange rates. A $14.5 million increase relates to Canadian deferred tax assets that management has determined it is more likely than not that the assets will not be realized.

At December 31, 2013 and 2012, cumulative undistributed earnings of foreign subsidiaries included in consolidated retained earnings amounted to $1.2 billion and $0.8 billion, respectively. These earnings are indefinitely reinvested in international operations. Accordingly, no provision has been made for U.S. deferred taxes related to future repatriation of these earnings, nor is it practical to estimate the amount of income taxes that would have to be provided if we were to conclude that such earnings will be remitted in the foreseeable future.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	(In Millions)
	2013		2012			2011
Unrecognized tax benefits balance as of January 1	$	55.5	$	102.1		$	79.8
Increases for tax positions in prior years	13.6		2.7			42.1
Increases for tax positions in current year	5.3		11.1			29.5
Increase due to foreign exchange	—		—			—
Settlements	—		(60.4		)	(3.5		)
Lapses in statutes of limitations	—		—			(45.8		)
Other	—		—			—
Unrecognized tax benefits balance as of December 31	$	74.4	$	55.5		$	102.1

At December 31, 2013 and 2012, we had $74.4 million and $55.5 million, respectively, of unrecognized tax benefits recorded. Of this amount, $25.9 million and $7.0 million were recorded in Other liabilities and $48.5 million was recorded as Other non-current assets in the Statements of Consolidated Financial Position for both years. If the $74.4 million were recognized, the full amount would impact the effective tax rate. We do not expect that the amount of unrecognized tax benefits will change significantly within the next twelve months. At December 31, 2013 and 2012, we had $1.2 million and $0.8 million, respectively, of accrued interest and penalties related to the unrecognized tax benefits recorded in Other liabilities in the Statements of Consolidated Financial Position.

On July 18, 2013, the FASB issued Accounting Standards Update No. 2013-11. Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (ASU 2013-11). ASU 2013-11 requires the netting of unrecognized tax benefits against a deferred tax asset for a loss or other carryforward that would apply in settlement of the uncertain tax positions except where the deferred tax asset or other carryforward are not available for use. The adoption of the pronouncement does not have an impact in the presentation of our financial statement.

Tax years that remain subject to examination are years 2009 and forward for the U.S., 2006 and forward for Canada, and 2007 and forward for Australia.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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