NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Deferred tax assets and liabilities are determined based on temporary differences between income and expenses reported for financial reporting and tax reporting. The Company 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, the Company 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 the Company has had cumulative losses in recent years, the accounting guidance suggests that the Company 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 2006, the deferred tax asset was reduced by $5.7 million to $69.1 million with a corresponding adjustment to the provision for income taxes. In fiscal 2004, a similar adjustment reduced the deferred tax asset by $15 million. The book value of the net deferred tax asset was supported by the availability of various tax strategies which, if executed, were expected to generate sufficient taxable income to realize the remaining asset. The Company has periodically assessed the realizability of its net deferred tax asset and has made adjustments as necessary. The increase in the valuation allowance that was attributable to discontinued operations was $8.7 million, $34.7 million, and $16.2 million in fiscal 2006, 2005, and 2004, 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 for income taxes on continuing operations for the last three fiscal years is summarized below:
| 2006 | 2005 | 2004 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (Amounts in thousands) | |||||||||||
| Current: U.S. Federal |
$ | (1,035 | ) | $ | — | $ | — | ||||
| Foreign | 198 | 1,712 | (1,185 | ) | |||||||
| State | (4,801 | ) | (3,063 | ) | (2,264 | ) | |||||
| (5,638 | ) | (1,351 | ) | (3,449 | ) | ||||||
| Deferred, principally Federal: Deferred tax valuation allowance |
(5,880 | ) | (16,752 | ) | (6,963 | ) | |||||
| Tax loss carryforward | 7,236 | 9,055 | 6,645 | ||||||||
| Insurance reserves | 1,013 | 1,917 | 2,348 | ||||||||
| Deferred compensation and benefits | (3,352 | ) | (3,596 | ) | (1,286 | ) | |||||
| Product warranty reserves | 772 | 3,153 | (1,521 | ) | |||||||
| Dealer volume rebates | 946 | 198 | (1,220 | ) | |||||||
| Depreciation | 246 | (3,479 | ) | (1,750 | ) | ||||||
| Restructuring accruals | (6,182 | ) | 7,926 | 5,403 | |||||||
| Other financial accruals | (506 | ) | 1,578 | (16,656 | ) | ||||||
| (5,707 | ) | — | (15,000 | ) | |||||||
| $ | (11,345 | ) | $ | (1,351 | ) | $ | (18,449 | ) | |||
The provision for income taxes on continuing operations computed by applying the Federal statutory rate to loss before taxes is reconciled to the actual provision for the last three fiscal years as follows:
| 2006 | 2005 | 2004 | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | % | Amount | % | Amount | % | ||||||||||||||||||
| (Amounts in thousands) | |||||||||||||||||||||||
| Income (loss) from continuing operations before (provision) benefit for income taxes: U.S. Federal |
$ | 7,186 | 136.1 | % | $ | (65,748 | ) | 92.3 | % | $ | 32,704 | 91.3 | % | ||||||||||
| Foreign | (1,906 | ) | (36.1 | ) | (5,478 | ) | 7.7 | 3,103 | 8.7 | ||||||||||||||
| $ | 5,280 | 100.0 | % | $ | (71,226 | ) | 100.0 | % | $ | 35,807 | 100.0 | % | |||||||||||
| Computed statutory tax | $ | (1,848 | ) | (35.0 | )% | $ | 24,929 | 35.0 | % | $ | (12,532 | ) | (35.0 | )% | |||||||||
| Valuation allowance | (5,880 | ) | (111.4 | ) | (16,752 | ) | (23.5 | ) | (6,963 | ) | (19.4 | ) | |||||||||||
| Foreign taxes, net | 469 | 8.9 | 205 | 0.3 | (99 | ) | (0.3 | ) | |||||||||||||||
| State income taxes, net | (4,801 | ) | (90.9 | ) | (3,063 | ) | (4.3 | ) | (2,264 | ) | (6.3 | ) | |||||||||||
| Other items, net | 715 | 13.5 | (6,670 | ) | (9.4 | ) | 3,409 | 9.5 | |||||||||||||||
| $ | (11,345 | ) | (214.9 | )% | $ | (1,351 | ) | (1.9 | )% | $ | (18,449 | ) | (51.5 | )% | |||||||||
The components of the Company’s deferred tax assets at April 30, 2006 and April 24, 2005 were as follows:
| 2006 | 2005 | ||||||
|---|---|---|---|---|---|---|---|
| (Amounts in thousands) | |||||||
| Tax loss carryforward | $ | 112,058 | $ | 73,403 | |||
| Insurance reserves | 19,435 | 18,560 | |||||
| Deferred compensation and benefits | 19,546 | 23,135 | |||||
| Product warranty reserves | 22,809 | 22,037 | |||||
| Dealer volume rebates | 2,893 | 1,947 | |||||
| Property, plant and equipment | 6,498 | 6,982 | |||||
| Restructuring accruals | 5,225 | 31,156 | |||||
| Other financial accruals | 13,822 | 14,853 | |||||
| 202,286 | 192,073 | ||||||
| Valuation allowance | (133,230 | ) | (117,310 | ) | |||
| $ | 69,056 | $ | 74,763 | ||||
At April 30, 2006, the Company had a Federal net operating loss carryforward of approximately $287.3 million. The Federal net operating loss carryforward begins to expire in 2023. In addition, the Company has related state net operating loss carryforwards with varying expiration dates. The Company’s net operating loss carryforward included tax deductions relating to the exercise of non-qualified stock options totaling $12.0 million. These potential future tax benefits were fully offset by a valuation allowance. Upon future realization of these deductions, approximately $4.7 million of the deferred tax asset would be recognized directly to shareholders’ equity as additional paid-in-capital.