Graco 2012 Annual Report Download - page 95

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89
A reconciliation of the U.S. statutory rate to the effective income tax rate is as follows for the years ended December 31,:
2012 2011 2010
Statutory rate 35.0% 35.0% 35.0%
Add (deduct) effect of:
State income taxes, net of federal income tax effect 0.6 2.2 1.8
Foreign tax credit (3.8)(12.2)(10.1)
Foreign rate differential (4.0)(20.3)(0.2)
Resolution of tax contingencies, net of increases 2.2 (20.3)(20.3)
Tax basis differential on goodwill impairment — 38.0 —
Valuation allowance reserve increase (decrease) 1.2 0.7 (2.5)
Stock compensation 0.2 1.5 1.9
Other (2.0)(12.9)(3.7)
Effective rate 29.4% 11.7% 1.9%
The Company files numerous consolidated and separate income tax returns in the U.S. federal jurisdiction and various state and
foreign jurisdictions. The statute of limitations for the Company’s U.S. federal income tax returns has expired for years prior to
2009.
During 2012, the Company's effective tax rate was driven by changes in pretax income and the geographical mix in earnings, the
unfavorable impact on reserves for certain tax contingencies, the expiration of statutes of limitation and audit settlements, and
other non-cash tax charges associated with the European Transformation Plan.
During 2011, the Company’s effective tax rate was impacted by $76.2 million of tax benefits associated with impairment charges
recorded during the year. The Company’s effective tax rate was favorably impacted by $49.0 million associated with the realization
of unrecognized tax benefits, including interest and penalties, due to the expiration of various worldwide statutes of limitation.
The effective tax rate for the year ended December 31, 2011 was also favorably impacted by a change in the geographical mix in
earnings.
During 2010, the Company settled its 2005 and 2006 U.S. federal income tax return examinations, including all issues that were
at the IRS Appeals Office, and as part of this settlement, entered into binding closing agreements relating to specific issues under
examination, resulting in a reduction to the Company’s unrecognized tax benefits in the amount of $63.6 million, including relevant
penalties and interest. In addition, the Company’s effective tax rate was favorably impacted by $8.2 million due to the reversal of
certain tax reserves upon resolution of a tax examination and was adversely affected by $6.7 million due primarily to the write-
off of deferred tax assets determined not to be realizable upon the vesting of equity-based compensation. The Company’s Canadian
income tax returns are subject to examination for years after 2004. With few exceptions, the Company is no longer subject to other
income tax examinations for years before 2007.
It is reasonably possible that there could be a change in the amount of the Company’s unrecognized tax benefits within the next
12 months due to activities of the IRS or other taxing authorities, including proposed assessments of additional tax, possible
settlement of audit issues, or the expiration of applicable statutes of limitations. The range of the possible change in unrecognized
tax benefits within the next 12 months cannot be reasonably estimated at December 31, 2012.