Notes to Consolidated Financial Statements
For 2006, the assumed annual rate of increase in the cost of covered health care benefits is 9.0% (8.0% last year). It is assumed to decrease gradually to 5.0% in the year 2011 (4.5% last year) and remain at that level thereafter. Changing the assumed health care cost trend would have the following effect:
| (millions) |
1-Percentage-
point increase |
1-Percentage-
point decrease |
| Effect on total of service and interest |
|
|
| cost components in 2005 |
|
$ .5 |
|
|
$ (.4) |
|
| Effect on benefit obligation as of |
|
|
| November 30, 2005 |
|
7.0 |
|
|
(6.2) |
|
In December of 2003, the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the Act) was enacted in the U.S. The Act introduced a prescription drug benefit under Medicare as well as a federal subsidy of 28% of drug costs between $250 and $5,000, tax-free (the Subsidy), to sponsors of retiree health benefit plans that provide a benefit that meets certain criteria. Our other postretirement plans covering U.S. retirees currently provide certain prescription benefits to eligible participants. Our actuaries have determined that one of our prescription drug plans for retirees, retired prior to January 1, 2004, provides a benefit that is at least actuarially equivalent to Medicare Part D under the Act.
In connection with the adoption of FASB Staff Position 106-2, the Act had the effect of reducing the accumulated postretirement benefit obligation by $9.9 million. This resulted in an unrecognized net gain to the plan, which is currently being amortized. The annual reduction in our other postretirement benefits expense due to the Subsidy is expected to be approximately $1.6 million, which includes the amortization of the unrecognized net gain.
11. INCOME TAXES
The provision for income taxes consists of the following:
| (millions) |
2005 |
|
2004 |
|
2003 |
|
| Income taxes |
|
|
|
|
|
|
| Current |
|
|
|
|
|
|
| Federal |
$ 62.5 |
|
$ 67.4 |
|
$ 48.2 |
|
| State |
4.8 |
|
7.7 |
|
4.1 |
|
| International |
23.5 |
|
15.6 |
|
15.5 |
|
| |
90.8 |
|
90.7 |
|
67.8 |
|
| Deferred |
|
|
|
|
|
|
| Federal |
10.1 |
|
1.5 |
|
15.3 |
|
| State |
1.0 |
|
- |
|
1.4 |
|
| International |
(5.2 |
) |
(3.2 |
) |
(1.1 |
) |
| |
5.9 |
|
(1.7 |
) |
15.6 |
|
| Total income taxes |
$ 96.7 |
|
$ 89.0 |
|
$ 83.4 |
|
The components of income from consolidated continuing operations before income taxes follow:
| (millions) |
2005 |
2004 |
2003 |
| Pretax income |
|
|
|
| United States |
$ 208.6 |
$ 204.5 |
$ 175.6 |
| International |
87.1 |
89.3 |
94.4 |
| |
$ 295.7 |
$ 293.8 |
$ 270.0 |
A reconciliation of the U.S. federal statutory rate with the effective tax rate follows:
| |
2005 |
|
2004 |
|
2003 |
|
| Federal statutory tax rate |
35.0 |
% |
35.0 |
% |
35.0 |
% |
| State income taxes, net of |
|
|
|
|
|
|
| federal benefits |
1.3 |
|
1.7 |
|
1.3 |
|
| Tax effect of international operations |
(3.3 |
) |
(5.8 |
) |
(5.3 |
) |
| Tax credits |
(.3 |
) |
(.5 |
) |
(.8 |
) |
| Other, net |
- |
|
(.1 |
) |
.7 |
|
| Effective tax rate |
32.7 |
% |
30.3 |
% |
30.9 |
% |
Deferred tax assets and liabilities are comprised of the following:
| (millions) |
2005
|
|
2004
|
|
| Deferred tax assets |
|
|
|
|
|
|
| Employee benefit liabilities |
$ |
71.6 |
|
$ |
68.1 |
|
| Accrued expenses and other reserves |
|
18.3 |
|
|
27.5 |
|
| Inventory |
|
6.1 |
|
|
8.4 |
|
| Net operating and capital loss carryforwards |
|
9.2 |
|
|
11.5 |
|
| Other |
|
9.2 |
|
|
16.0 |
|
| Valuation allowance |
|
(8.0 |
) |
|
(13.3 |
) |
| |
|
106.4 |
|
|
118.2 |
|
| Deferred tax liabilities |
|
|
|
|
|
|
| Depreciation |
|
61.9 |
|
|
54.7 |
|
| Intangible assets |
|
69.2 |
|
|
17.1 |
|
| Other |
|
6.0 |
|
|
21.3 |
|
| |
|
137.1 |
|
|
93.1 |
|
| Net deferred tax asset (liability) |
$ |
(30.7 |
) |
$ |
25.1 |
|
At November 30, 2005, our non-U.S. subsidiaries have tax loss carryforwards of $18.2 million. Of these carryforwards, $8.3 million expire through 2015 and $9.9 million may be carried forward indefinitely. The current statutory rates in these countries range from 26% to 37%.
At November 30, 2005, our non-U.S. subsidiaries have capital loss carryforwards of $13.6 million. Of these carryforwards, $1.8 million expire in 2009 and $11.8 million may be carried forward indefinitely. The current statutory rates in these countries range from 15% to 30%.
A valuation allowance has been provided to record deferred tax assets
at their net realizable value. The $5.3 million net decrease in the
valuation allowance was due to an additional valuation allowance of
$0.9 million related to losses generated in 2005 which may not be realized
in future periods, offset by a decrease in the valuation allowance of
$6.2 million. The $6.2 million decrease is due to lower foreign currency
exchange rates of $1.2 million and the remainder primarily due to valuation
allowances no longer required as the underlying expenses that created
the deferred tax assets were disallowed in a tax audit.
|
