Income Taxes

The company recognized an $87 million income tax benefit in the second quarter of 2011 for the reversal of valuation allowances against the entire U.S. federal deferred tax assets and a portion of the state deferred tax assets, primarily net operating loss carry forwards ("NOLs"), which are more likely than not to be realized in the future. The reversal of valuation allowances was the result of business improvements and debt reductions over several years that created a trend of U.S. taxable income beginning with tax year 2009 and an expectation that this trend will continue, even if seasonal losses may be incurred in interim periods. The company regularly reviews all deferred tax assets to estimate whether these assets are more likely than not to be realized based on all available evidence. Unless deferred tax assets are more likely than not to be realized, a valuation allowance is established to reduce the carrying value of the deferred tax asset until such time that realization becomes more likely than not. Increases and decreases in these valuation allowances are included in "Income tax benefit (expense)" in the Condensed Consolidated Statements of Income. Through the second quarter of 2011, valuation allowances on available U.S. NOLs significantly affected the company's effective tax rate; if a deferred tax asset with a full valuation allowance, such as an NOL, was realized, the corresponding valuation allowance was also released, resulting in no net effect to income taxes reported in the Condensed Consolidated Statements of Income. As a result of the U.S. valuation allowance release in the second quarter of 2011, the company expects an increase of reported income tax expense, but no increase in cash paid for taxes for at least several years until the NOLs are fully utilized.

As a result of reversing the valuation allowance against U.S. federal deferred tax assets, as described above, the company changed from the discrete method to the effective tax rate method for interim tax reporting. Under the effective tax rate method, the company is required to adjust its effective tax rate for each quarter to be consistent with the estimated annual effective tax rate. Jurisdictions with a projected loss where no tax benefit can be recognized are excluded from the calculation of the estimated annual effective tax rate. This could result in a higher or lower effective tax rate in the interim period based upon the mix and timing of actual earnings versus annual projections. The company's overall effective tax rate may also vary significantly from period to period due to the level and mix of income among domestic and foreign jurisdictions. Many of these foreign jurisdictions have tax rates that are lower than the U.S. statutory rate, and the company continues to maintain full valuation allowances on deferred tax assets in some of these foreign jurisdictions. Other items that do not otherwise affect the company's earnings can also affect the overall effective tax rate, such as the effect of changing exchange rates on intercompany balances that can change the mix of income among domestic and foreign jurisdictions. In the quarter and six months ended June 30, 2012, the difference in the overall effective tax rate from the U.S. statutory rate is due to the mix of earnings and losses in various jurisdictions, as well as discrete tax items, including a $2 million out of period adjustment in the first quarter of 2012 relating to 2011. The company does not believe the error was material to any prior or current year financial statements. Additionally, "Income tax benefit (expense)" includes $6 million of expense in the second quarter of 2011 related to the settlement of an Italian income tax audit. See Note 13 under Italian Customs and Tax Cases.

No U.S. taxes have been accrued on foreign earnings because such earnings have been or are expected to be permanently invested in foreign operations.

The company nets deferred tax assets and liabilities by jurisdiction. Deferred taxes are included as follows on the Condensed Consolidated Balance Sheets:



(In thousands)	June 30, 2012			December 31, 2011			June 30, 2011
Other current assets	$	26,685		$	26,685		$	25,697
Investments and other assets, net	2,381			3,508			2,991
Deferred tax liabilities	(43,667		)	(43,248		)	(54,197		)
Net deferred tax liability	$	(14,601	)	$	(13,055	)	$	(25,509	)

In the ordinary course of business, there are many transactions and calculations where the ultimate income tax determination is uncertain. The evaluation of a tax position is a two-step process. The first step is to evaluate the uncertain tax position for recognition by determining if the weight of available evidence indicates that it is "more likely than not" that a tax position, including resolution of any related appeals or litigation, will be sustained upon examination based on its technical merits. If the recognition criterion is met, the second step is to measure the income tax benefit to be realized. Tax positions or portions of tax positions that do not meet these criteria are de-recognized by recording reserves. The company establishes reserves for income tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes, penalties and interest could be due. Provisions for and changes to these reserves, as well as the related net interest and penalties, are included in "Income tax benefit (expense)" in the Condensed Consolidated Statements of Income. Significant judgment is required in evaluating tax positions and determining the company's provision for income taxes. At June 30, 2012, the company had unrecognized tax benefits of approximately $6 million, of which $4 million, if recognized, will reduce income tax expense and affect the company's effective tax rate. Interest and penalties included in income tax expense was not significant for the quarters or six months ended June 30, 2012 and 2011. The cumulative interest and penalties included in the Condensed Consolidated Balance Sheets at June 30, 2012 was $2 million. During the next twelve months, it is reasonably possible that unrecognized tax benefits impacting the effective tax rate could be recognized as a result of the expiration of statutes of limitation in the amount of $1 million plus accrued interest and penalties.