[Notes to Financial Statements]

3 INCOME TAXES

The domestic and foreign components of income before income taxes consist of the following:

The deferred tax expense does not represent cash payment of income taxes and was primarily generated by the utilization of net operating loss (NOL) carryforwards and the increase of temporary differences, and will not require future cash payments. Consolidated tax payments made during 1999, 1998 and 1997 were $40 million, $7 million and $10 million, respectively.

The relationship of the tax expense to income before taxes for 1999, 1998 and 1997 differs from the U.S. statutory rate (35%) because of state income taxes and the benefit of NOL carryforwards in foreign countries. Also, the 1999 and 1998 effective tax rates reflect a $178 million and $45 million reduction in the deferred tax asset valuation allowance, respectively. A valuation allowance has been provided for those NOL carryforwards and temporary differences which are estimated to expire before they are utilized. The effective tax rates for 1999, 1998 and 1997 were 8.0%, 27.0% and 38.0%, respectively.

As a result of continued strong industry demand, the continued successful implementation of the company's manufacturing strategies, changes in the company's operating structure, and other positive operating indicators, management reviewed its projected future taxable income and evaluated the impact of these changes on its deferred tax asset valuation allowance. This review was completed during the third quarter of 1999 and resulted in a reduction to the deferred tax asset valuation allowance of $178 million which reduced income tax expense during the third quarter of 1999. In addition, a $45 million reduction in the allowance was recorded during the fourth quarter of 1998 based on a similar review.

Undistributed earnings of foreign subsidiaries were $126 million and $50 million at October 31, 1999 and 1998, respectively. Taxes have not been provided on these earnings because no withholding taxes are applicable upon repatriation and any U.S. tax would be substantially offset by the utilization of NOL carryforwards.

Taxpaying entities of the company offset all deferred tax assets and liabilities within each tax jurisdiction. The components of the deferred tax asset (liability) at October 31 are as follows:

At October 31, 1999, the company had $1,045 million of domestic and $89 million of foreign NOL carryforwards available to offset future taxable income. Such carryforwards reflect income tax losses incurred which will expire as follows, in millions of dollars:

Additionally, the reversal of net temporary differences of $1,224 million as of October 31, 1999 will create net tax deductions which, if not utilized previously, will expire subsequent to 2011.

  Annual Report 1999