Notes to Consolidated Financial Statements
11. INCOME TAXES
The provision for income taxes consists of the following:
| (millions) | 2006 | 2005 | 2004 | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Income taxes Current Federal |
$ | 70.5 | $ | 62.5 | $ | 67.4 | |||
| State | 6.9 | 4.8 | 7.7 | ||||||
| International | 13.3 | 23.5 | 15.6 | ||||||
| 90.7 | 90.8 | 90.7 | |||||||
| Deferred Federal |
(18.2 | ) | 10.1 | 1.5 | |||||
| State | (1.8 | ) | 1.0 | – | |||||
| International | (6.0 | ) | (5.2 | ) | (3.2 | ) | |||
| (26.0 | ) | 5.9 | (1.7 | ) | |||||
| Total income taxes | $ | 64.7 | $ | 96.7 | $ | 89.0 | |||
The components of income from consolidated operations before income taxes follow:
| (millions) | 2006 | 2005 | 2004 | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Pretax income United States |
$ | 153.5 | $ | 208.6 | $ | 204.5 | |||
| International | 69.5 | 87.1 | 89.3 | ||||||
| $ | 223.0 | $ | 295.7 | $ | 293.8 | ||||
A reconciliation of the U.S. federal statutory rate with the effective tax rate follows:
| 2006 | 2005 | 2004 | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Federal statutory tax rate | 35.0 | % | 35.0 | % | 35.0 | % | |||
| State income taxes, net of federal benefits |
1.3 | 1.3 | 1.7 | ||||||
| Tax effect of international operations | (5.7 | ) | (3.3 | ) | (5.8 | ) | |||
| Tax credits | – | (.3 | ) | (.5 | ) | ||||
| U.S. manufacturing deduction | (.8 | ) | – | – | |||||
| Other, net | (.8 | ) | – | (.1 | ) | ||||
| Effective tax rate | 29.0 | % | 32.7 | % | 30.3 | % | |||
Deferred tax assets and liabilities are comprised of the following:
| (millions) | 2006 | 2005 | ||||
|---|---|---|---|---|---|---|
| Deferred tax assets Employee benefit liabilities |
$ | 79.2 | $ | 71.6 | ||
| Accrued expenses and other reserves | 24.1 | 18.3 | ||||
| Inventory | 6.7 | 6.1 | ||||
| Net operating and capital loss carryforwards | 7.1 | 9.2 | ||||
| Other | 10.6 | 9.2 | ||||
| Valuation allowance | (6.3 | ) | (8.0 | ) | ||
| 121.4 | 106.4 | |||||
| Deferred tax liabilities Depreciation |
47.9 | 61.9 | ||||
| Intangible assets | 73.7 | 69.2 | ||||
| Other | 5.5 | 6.0 | ||||
| 127.1 | 137.1 | |||||
| Net deferred tax liability | $ | (5.7 | ) | $ | (30.7 | ) |
At November 30, 2006, our non-U.S. subsidiaries have tax loss carryforwards of $11.2 million. Of these carryfor-wards, $4.8 million expire through 2011, $3.0 million through 2021 and $3.4 million may be carried forward indefinitely. The current statutory rates in these countries range from 30% to 34%.
At November 30, 2006, our non-U.S. subsidiaries have capital loss carryforwards of $12.9 million. Of these carry-forwards, $2.0 million expire in 2009 and $10.9 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 $1.7 million net decrease in the valuation allowance was due to an additional valuation allowance of $1.3 million related to losses generated in 2006 which may not be realized in future periods, offset by a decrease in the valuation allowance of $3.0 million. The $3.0 million decrease primarily relates to the utilization of tax losses and the expiration of tax loss carryforwards offset by an additional valuation allowance requirement for prior year losses and higher foreign currency exchange rates.
U.S. income taxes are not provided for unremitted earnings of international subsidiaries and affiliates where our intention is to reinvest these earnings permanently or to repatriate the earnings when it is tax effective to do so. Accordingly, we believe that any U.S. tax on repatriated earnings would be substantially offset by U.S. foreign tax credits. Unremitted earnings of such entities were $359.8 million at November 30, 2006.