(6) Income Taxes
Deferred tax assets and liabilities are determined based on temporary differences between income and expenses reported for financial reporting and tax reporting. Fleetwood is required to record a valuation allowance to reduce its net deferred tax assets to the amount that it believes is more likely than not to be realized. In assessing the need for a valuation allowance, Fleetwood historically had considered all positive and negative evidence, including scheduled reversals of deferred tax liabilities, prudent and feasible tax planning strategies, projected future taxable income, and recent financial performance. Since Fleetwood has had cumulative losses in recent years, the accounting guidance suggests that Fleetwood should not look to future earnings to support the realizability of the net deferred tax asset. As a result, management concluded that a partial valuation allowance against the deferred tax asset was appropriate. In fiscal 2008, the deferred tax asset was increased by $2.4 million to $56.7 million. The book value of the net deferred tax asset is supported by the availability of various tax strategies which, if executed, are expected to generate sufficient taxable income to realize the recorded asset. Fleetwood has periodically assessed the realizability of its net deferred tax asset and has made adjustments as necessary, generally to give effect to changes in the amount of available tax planning strategies. We continue to believe that the combination of all positive and negative factors will enable us to realize the full value of the net deferred tax assets; however, it is possible that the extent and availability of tax-planning strategies will change over time and impact this evaluation. If, after future assessments of the realizability of our deferred tax asset, we determine an adjustment is required, we would record the provision or benefit in the period of such determination.
The benefit (provision) for income taxes on continuing operations for the last three fiscal years is summarized below:
| 2008 | 2007 | 2006 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (Amounts in thousands) | |||||||||||
| Current: U.S. Federal |
$ | 180 | $ | — | $ | (1,035 | ) | ||||
| Foreign | (250 | ) | 1,021 | 198 | |||||||
| State | (665 | ) | (2,909 | ) | (4,801 | ) | |||||
| (735 | ) | (1,888 | ) | (5,638 | ) | ||||||
| Deferred, principally Federal: Deferred tax valuation allowance |
5,307 | (39,555 | ) | (4,744 | ) | ||||||
| Tax loss carryforward | 2,583 | 25,971 | 1,849 | ||||||||
| Insurance reserves | 330 | (656 | ) | 1,013 | |||||||
| Deferred compensation and benefits | (2,990 | ) | (1,819 | ) | (3,354 | ) | |||||
| Product warranty reserves | (4,586 | ) | (222 | ) | 991 | ||||||
| Dealer volume rebates | (667 | ) | (255 | ) | 946 | ||||||
| Depreciation | (949 | ) | 62 | 227 | |||||||
| Restructuring accruals | 584 | (457 | ) | (6,182 | ) | ||||||
| Other financial accruals | 4,760 | (290 | ) | 3,547 | |||||||
| 4,372 | (17,221 | ) | (5,707 | ) | |||||||
| $ | 3,637 | $ | (19,109 | ) | $ | (11,345 | ) | ||||
The benefit (provision) for income taxes from continuing operations and discontinued operations is as follows:
| 2008 | 2007 | 2006 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (Amounts in thousands) | |||||||||||
| Continuing operations | $ | 3,637 | $ | (19,109 | ) | $ | (11,345 | ) | |||
| Discontinued operations | (2,500 | ) | 2,500 | — | |||||||
| Benefit (provision) for income taxes | $ | 1,137 | $ | (16,609 | ) | $ | (11,345 | ) | |||
The benefit (provision) for income taxes on continuing operations computed by applying the Federal statutory rate to income (loss) before taxes is reconciled to the actual benefit (provision) for the last three fiscal years as follows:
| 2008 | 2007 | 2006 | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | % | Amount | % | Amount | % | ||||||||||||||||||
| (Amounts in thousands) | |||||||||||||||||||||||
| Income (loss) from continuing operations before benefit (provision) for income taxes: U.S. Federal |
$ | 3,091 | (430.5 | )% | $ | (45,306 | ) | 76.9 | % | $ | 13,401 | 116.6 | % | ||||||||||
| Foreign | (3,809 | ) | 530.5 | (13,598 | ) | 23.1 | (1,906 | ) | (16.6 | ) | |||||||||||||
| $ | (718 | ) | 100.0 | % | $ | (58,904 | ) | 100.0 | % | $ | 11,495 | 100.0 | % | ||||||||||
| Computed statutory tax | $ | 251 | 35.0 | % | $ | 20,616 | 35.0 | % | $ | (4,023 | ) | (35.0 | )% | ||||||||||
| Valuation allowance | 5,307 | 739.1 | (39,555 | ) | (67.2 | ) | (4,744 | ) | (41.3 | ) | |||||||||||||
| Foreign taxes, net | (250 | ) | (34.8 | ) | 1,021 | 1.8 | 469 | 4.1 | |||||||||||||||
| State income taxes, net | (665 | ) | (92.6 | ) | (2,909 | ) | (4.9 | ) | (4,801 | ) | (41.8 | ) | |||||||||||
| Other items, net | (1,006 | ) | (140.2 | ) | 1,718 | 2.9 | 1,754 | 15.3 | |||||||||||||||
| $ | 3,637 | 506.5 | % | $ | (19,109 | ) | (32.4 | )% | $ | (11,345 | ) | (98.7 | )% | ||||||||||
The components of Fleetwood's deferred tax assets at April 27, 2008 and April 29, 2007 were as follows:
| 2008 | 2007 | ||||||
|---|---|---|---|---|---|---|---|
| (Amounts in thousands) | |||||||
| Tax loss carryforward | $ | 130,363 | $ | 127,780 | |||
| Insurance reserves | 19,109 | 18,779 | |||||
| Deferred compensation and benefits | 14,708 | 17,698 | |||||
| Product warranty reserves | 17,072 | 21,658 | |||||
| Dealer volume rebates | 1,971 | 2,638 | |||||
| Property, plant and equipment | 4,078 | 5,027 | |||||
| Restructuring accruals | 5,286 | 4,702 | |||||
| Other financial accruals | 15,281 | 10,521 | |||||
| 207,868 | 208,803 | ||||||
| Valuation allowance | (151,146 | ) | (154,468 | ) | |||
| $ | 56,722 | $ | 54,335 | ||||
At April 27, 2008, Fleetwood had a domestic Federal net operating loss carryforward of approximately $375 million and a foreign net operating loss carryforward of $3.4 million. The Federal and foreign net operating loss carryforwards begin to expire in 2023 and 2017, respectively. In addition, Fleetwood has related state net operating loss carryforwards of $178.1 million with varying expiration dates. Companies are subject to a change of ownership test, as defined by applicable tax code, that, if met, would limit the annual utilization of net operating loss carryforwards. Fleetwood monitors this calculation and, at April 27, 2008, has not had a change of ownership as defined by the code. Although not included in the components of deferred taxes above, $13.3 million of Fleetwood's Federal net operating loss carryforward relates to tax deductions from the exercise of non-qualified stock options. Upon future realization of these deductions, approximately $5.2 million will be recognized directly to shareholders' equity as additional paid-in capital.
On April 30, 2007, the Company adopted the provisions of FIN 48. There was no material impact to the Company of adopting FIN 48. As of the date of adoption, the Company had accrued a $3.7 million liability for uncertain tax positions and $0.7 million for interest and penalties on uncertain tax positions.
A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest and penalties, is as follows (in millions):
| Unrecognized tax benefits, April 30, 2007 | $ | 3.7 | |
| Increase in prior-period tax positions | 8.4 | ||
| Decrease in prior-period tax positions | (0.3 | ) | |
| Current year tax positions | — | ||
| Settlements | (0.2 | ) | |
| Lapse of statute of limitations | — | ||
| Unrecognized tax benefits, April 27, 2008 | $ | 11.6 |
Of the $11.6 million of unrecognized tax benefits, $3.3 million, if recognized, would favorably affect the Company's effective tax rate.
The Company recognizes interest and penalties, as applicable, related to uncertain tax positions in the provision for income taxes. As of April 27, 2008, the Company has accrued additional $1.1 million of interest and penalties related to uncertain tax positions.
The Company strives to resolve open matters with each tax authority at the examination level and could reach agreement with a tax authority at any time. While the Company has accrued for amounts it believes are the probable outcomes, the final outcome with a tax authority may result in a tax liability that is more or less than that reflected in the consolidated financial statements. Furthermore, the Company may later decide to challenge any assessments, if made, and may exercise its right to appeal. The unrecognized tax positions are reviewed quarterly and adjusted as events occur that affect potential liabilities for additional taxes, such as lapsing of applicable statutes of limitations, proposed assessments by tax authorities, negotiations between tax authorities, identification of new issues, and issuance of new legislation, regulations, or case law. Management believes that adequate amounts of tax and related interest have been provided for any adjustments that may result from these uncertain tax positions.
As a result of audits, the total liability for unrecognized tax benefits may change within the next 12 months due to either settlement of audits or expiration of statutes of limitations. Quantification of those potential changes cannot be estimated at this time. At April 27, 2008, the Company has concluded all United States federal and state income tax matters for years through 2002.