Income Taxes

9 Months Ended

Sep. 30, 2011

Income Taxes [Abstract]

Income Taxes

Note 8 – Income Taxes

As a result of sustained improvements in the performance of the company's North American businesses and the benefits of debt reduction over the last several years, the company has been generating annual U.S. taxable income beginning with tax year 2009, and expects this trend to continue, even if seasonal losses may be incurred in interim periods. As of June 30, 2011, the company's forecast included second quarter results as well as increased visibility to North American banana pricing and stabilized sourcing costs. As a result of these considerations, the company recognized an $87 million income tax benefit in the second quarter of 2011 for the reversal of valuation allowances against 100% of the 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 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 future 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. 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. The company had $26 million, $5 million and $0 of net current deferred tax assets in "Other current assets" on the Condensed Consolidated Balance Sheets at September 30, 2011, December 31, 2010 and September 30, 2010, respectively. The company had $3 million, $4 million, and $0 of net non-current deferred tax assets at September 30, 2011, December 31, 2010 and September 30, 2010, respectively. The company had $51 million, $116 million and $105 million of net non-current deferred tax liabilities at September 30, 2011, December 31, 2010 and September 30, 2010, respectively.

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 September 30, 2011, the company had unrecognized tax benefits of approximately $9 million, of which $7 million, if recognized, will reduce income tax expense and affect the company's effective tax rate. Interest and penalties included in income taxes was less than $1 million for both of the quarters ended September 30, 2011 and 2010, and less than $1 million for the nine months ended September 30, 2011 and 2010, respectively. The cumulative interest and penalties included in the Condensed Consolidated Balance Sheet at September 30, 2011 was $4 million.

In addition to the U.S. valuation allowance release as described above, "Income tax benefit (expense)" in the Condensed Consolidated Statements of Income includes $6 million in expense in the second quarter of 2011 related to the settlement of an Italian income tax audit compared to $4 million in benefits in the third quarter of 2010 related to governmental rulings in various jurisdictions. See Note 13 under Italian Customs and Tax Cases for recent tax contingency developments related to the Italian income tax settlement. 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 $3 million plus accrued interest and penalties.