NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 2007, the deferred tax asset was reduced by $14.7 million to $54.3 million with a corresponding adjustment to the provision for income taxes. 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 remaining 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. The increase in the valuation allowance that was attributable to discontinued operations was $0.9 million, $8.7 million, and $34.7 million in fiscal 2007, 2006, and 2005, respectively. 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 (provision) benefit for income taxes on continuing operations for the last three fiscal years is summarized below:
| 2007 | 2006 | 2005 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (Amounts in thousands) | |||||||||||
| Current: U.S. Federal |
$ | — | $ | (1,035 | ) | $ | — | ||||
| Foreign | 1,021 | 198 | 1,712 | ||||||||
| State | (2,909 | ) | (4,801 | ) | (3,063 | ) | |||||
| (1,888 | ) | (5,638 | ) | (1,351 | ) | ||||||
| Deferred, principally Federal: Deferred tax valuation allowance |
(42,348 | ) | (5,880 | ) | (16,752 | ) | |||||
| Tax loss carryforward | 29,446 | 7,236 | 9,055 | ||||||||
| Insurance reserves | (656 | ) | 1,013 | 1,917 | |||||||
| Deferred compensation and benefits | (1,819 | ) | (3,352 | ) | (3,596 | ) | |||||
| Product warranty reserves | 1,071 | 772 | 3,153 | ||||||||
| Dealer volume rebates | (255 | ) | 946 | 198 | |||||||
| Depreciation | 62 | 246 | (3,479 | ) | |||||||
| Restructuring accruals | (457 | ) | (6,182 | ) | 7,926 | ||||||
| Other financial accruals | 235 | (506 | ) | 1,578 | |||||||
| (14,721 | ) | (5,707 | ) | — | |||||||
| $ | (16,609 | ) | $ | (11,345 | ) | $ | (1,351 | ) | |||
The provision for income taxes on continuing operations computed by applying the Federal statutory rate to income (loss) before taxes is reconciled to the actual provision for the last three fiscal years as follows:
| 2007 | 2006 | 2005 | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | % | Amount | % | Amount | % | ||||||||||||||||||
| (Amounts in thousands) | |||||||||||||||||||||||
| Income (loss) from continuing operations before (provision) benefit for income taxes: U.S. Federal |
$ | (57,443 | ) | 80.9 | % | $ | 7,186 | 136.1 | % | $ | (65,748 | ) | 92.3 | % | |||||||||
| Foreign | (13,598 | ) | 19.1 | (1,906 | ) | (36.1 | ) | (5,478 | ) | 7.7 | |||||||||||||
| $ | (71,041 | ) | 100.0 | % | $ | 5,280 | 100.0 | % | $ | (71,226 | ) | 100.0 | % | ||||||||||
| Computed statutory tax | $ | 24,864 | 35.0 | % | $ | (1,848 | ) | (35.0 | )% | $ | 24,929 | 35.0 | % | ||||||||||
| Valuation allowance | (42,348 | ) | (59.6 | ) | (5,880 | ) | (111.4 | ) | (16,752 | ) | (23.5 | ) | |||||||||||
| Foreign taxes, net | 1,021 | 1.4 | 469 | 8.9 | 205 | 0.3 | |||||||||||||||||
| State income taxes, net | (2,909 | ) | (4.1 | ) | (4,801 | ) | (90.9 | ) | (3,063 | ) | (4.3 | ) | |||||||||||
| Other items, net | 2,763 | 3.9 | 715 | 13.5 | (6,670 | ) | (9.4 | ) | |||||||||||||||
| $ | (16,609 | ) | (23.4 | )% | $ | (11,345 | ) | (214.9 | )% | $ | (1,351 | ) | (1.9 | )% | |||||||||
The components of Fleetwood’s deferred tax assets at April 29, 2007 and April 30, 2006 were as follows:
| 2007 | 2006 | ||||||
|---|---|---|---|---|---|---|---|
| (Amounts in thousands) | |||||||
| Tax loss carryforward | $ | 139,508 | $ | 107,378 | |||
| Insurance reserves | 18,779 | 19,435 | |||||
| Deferred compensation and benefits | 17,727 | 19,546 | |||||
| Product warranty reserves | 23,880 | 22,809 | |||||
| Dealer volume rebates | 2,638 | 2,893 | |||||
| Property, plant and equipment | 5,830 | 6,498 | |||||
| Restructuring accruals | 4,702 | 5,225 | |||||
| Other financial accruals | 13,070 | 13,822 | |||||
| 226,134 | 197,606 | ||||||
| Valuation allowance | (171,799 | ) | (128,550 | ) | |||
| $ | 54,335 | $ | 69,056 | ||||
At April 29, 2007, Fleetwood had a domestic Federal net operating loss carryforward of approximately $359 million and a Canadian net operating loss carryforward of $9.9 million. The Federal and Canadian net operating loss carryforward begins to expire in 2023 and 2027, respectively. In addition, Fleetwood has related state net operating loss carryforwards 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 this time, has not had a change of ownership. Although not included in the components of deferred taxes above, $12.0 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 $4.7 million will be recognized directly to shareholders’ equity as additional paid-in capital. Prior year deferred taxes and the related valuation allowance have been reduced by $4.7 million in order to remove the tax effect of stock-option deductions that have not been realized from tax loss carryforwards.