Provision For Income Taxes

3 Months Ended

Apr. 01, 2012

Provision For Income Taxes [Abstract]

Provision For Income Taxes

Note 8. Provision for Income Taxes

The tax provision for the three months ended April 1, 2012 includes a net $206.9 million non-cash charge to record a valuation allowance against our U.S. deferred tax assets.

As of December 31, 2011, we had deferred tax assets of $254.0 million, which include $33.4 million of general business credit carry-forwards and $48.1 million of foreign tax credit carry-forwards with expiration dates ranging from 2016 through 2031. The remainder of our deferred tax assets consist of tax timing items including postretirement obligations, deferred revenue and capitalized R&D expenses. The valuation allowance as of April 1, 2012 against these net deferred tax assets was increased from $29.0 million to $235.9 million in the first quarter of 2012. The deferred tax assets that do not have a valuation allowance include the foreign deferred tax assets and U.S. deferred tax assets that are offset by the accruals for unrealized tax positions.

Under GAAP, a valuation allowance against our deferred tax assets is appropriate if based on the available evidence, it is more likely than not (defined as a likelihood of more than 50%) that the value of such assets will not be realized in the future. The valuation of deferred tax assets requires judgment in assessing a number of factors, including the likely future tax consequences of events we expect to recognize in our financial statements and tax returns, as well as our historical performance.

The negative evidence of the financial accounting losses that we have recognized in recent periods is the single most significant factor in our assessment. We also consider positive evidence such as expected future reversals of existing temporary differences and prudent and feasible tax planning strategies. However, we view actual results as more reliable. During 2011, we considered the uncertainties associated with projected future taxable income (exclusive of reversing temporary differences) to be significant and we gave little weight to projections of future U.S. taxable income. This was the case even though a sizable portion of our U.S. losses were the result of charges incurred for restructurings, impairments, and other special items, and without these charges, we had cumulative operating income in the United States through December 31, 2011. So, in the fourth quarter of 2011, we based our assessment of the prospects for recovering deferred tax assets solely on the objective and verifiable evidence represented by our historical three-year average U.S. earnings (excluding certain non-recurring charges) and not on the future earnings we forecasted in excess of that average. For the fourth quarter, we recorded a $21.4 million valuation allowance.

In the quarter ended April 1, 2012, we recorded a pre-tax loss and significantly underperformed our forecast. Accordingly, in the first quarter of 2012, in light of the current performance as well as certain changes in management, we revised our forecast downward for our U.S. operations for the remainder of 2012. We considered all the foregoing as significant, objective and verifiable negative evidence that we took into account in our assessment. We concluded that it was more likely than not that the value of such assets would not be realized and that we needed therefore to record a valuation allowance for our U.S. entities representing the full balance of these assets.

A sustained period of profitability in our U.S. operations is required before we would change our judgment regarding the need for a full valuation allowance against our U.S. deferred tax assets. In the event that we determine in the future that we expect to benefit from our deferred income tax assets in excess of the net balance at that time, we will make an adjustment to the deferred tax asset valuation allowance. This will reduce the provision for income taxes in that period. Until such time, we will offset U.S. profits against our deferred tax assets and will reduce the overall level of deferred tax assets subject to valuation allowance as a result.

Our tax provision includes an estimated annual effective tax rate from continuing operations of approximately 30% for all jurisdictions other than the United States, Singapore and Japan, where we are not recognizing tax benefits due to losses. Our effective tax rate from continuing operations of 30% for 2012 is lower than the statutory rate of 35% due primarily to our projected mix and levels of taxable income between jurisdictions.

The tax benefit for the quarter ended April 3, 2011 reflected an effective tax rate of 32.6% compared to a U.S. statutory rate of 35%. The effective tax rate reflected our estimated annual effective tax rate of approximately 45.6% for the fiscal year 2011, and is partially offset by a discrete charge in the quarter for non-deductible acquisition costs. Our estimated annual effective tax rate for 2011 is higher than the statutory rate of 35% due primarily to our projected mix and levels of taxable income between jurisdictions.