Pre-Tax Income and Income Taxes

12 Months Ended

May 27, 2012

Pre-Tax Income and Income Taxes [Abstract]

PRE-TAX INCOME AND INCOME TAXES

16.  PRE-TAX INCOME AND INCOME TAXES

Pre-tax income from continuing operations (including equity method investment earnings) consisted of the following:

	2012		2011		2010
United States	$	492.6	$	1,177.7	$	856.0
Foreign		177.5		74.8		66.6
	$	670.1	$	1,252.5	$	922.6

The provision for income taxes included the following:

	2012			2011		2010
Current
Federal	$	163.9		$	157.3	$	259.0
State		23.7			21.0		27.5
Foreign		27.5			11.9		14.4
		215.1			190.2		300.9
Deferred
Federal		(13.4	)		219.2		(8.5	)
State		(5.2	)		9.8		(6.5	)
Foreign		(0.7	)		2.4		6.4
		(19.3	)		231.4		(8.6	)
	$	195.8		$	421.6	$	292.3

Income taxes computed by applying the U.S. Federal statutory rates to income from continuing operations before income taxes are reconciled to the provision for income taxes set forth in the consolidated statements of earnings as follows:

	2012			2011			2010
Computed U.S. Federal income taxes	$	232.2		$	438.3		$	322.9
State income taxes, net of U.S. Federal tax impact		12.0			20.0			15.7
Tax credits and domestic manufacturing deduction		(20.5	)		(27.5	)		(27.3	)
Foreign tax credits and related items, net		(0.6	)		(0.2	)		(4.3	)
IRS audit adjustments and settlement		0.8			0.5			(17.4	)
Non-taxable gain from investment in ATFL		(20.5	)		—			—
Change in valuation allowance		(7.1	)		2.1			(4.6	)
Other		(0.5	)		(11.6	)		7.3
	$	195.8		$	421.6		$	292.3

Income taxes paid, net of refunds, were $191.5 million, $172.3 million, and $290.5 million in fiscal 2012, 2011, and 2010, respectively.

The tax effect of temporary differences and carryforwards that give rise to significant portions of deferred tax assets and liabilities consisted of the following:

	2012					2011
	Assets			Liabilities		Assets			Liabilities
Property, plant and equipment	$	—		$	488.1	$	—		$	452.3
Goodwill, trademarks and other intangible assets		—			681.3		—			642.7
Accrued expenses		25.4			—		15.9			—
Compensation related liabilities		74.7			—		66.2			—
Pension and other postretirement benefits		310.7			—		230.9			—
Derivative cash flow hedge		57.2			—		4.4			—
Other liabilities that will give rise to future tax deductions		115.2			—		121.5			—
Net operating loss carryforwards		42.7			—		52.1			—
Other		67.4			31.4		46.4			24.1
		693.3			1,200.8		537.4			1,119.1
Less: Valuation allowance		(43.7	)		—		(50.8	)		—
Net deferred taxes	$	649.6		$	1,200.8	$	486.6		$	1,119.1

At May 27, 2012 and May 29, 2011, net deferred tax assets of $106.3 million and $93.4 million, respectively, were included in prepaid expenses and other current assets. At May 27, 2012 and May 29, 2011, net deferred tax liabilities of $657.5 million and $725.9 million, respectively, were included in other noncurrent liabilities.

The liability for gross unrecognized tax benefits at May 27, 2012 was $48.7 million, excluding a related liability of $14.0 million for gross interest and penalties. Included in the balance at May 27, 2012 were $3.1 million of tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period. Any associated interest and penalties imposed would affect the tax rate. As of May 29, 2011, our gross liability for unrecognized tax benefits was $56.5 million, excluding a related liability of $14.7 million for gross interest and penalties.

The net amount of unrecognized tax benefits at May 27, 2012 and May 29, 2011 that, if recognized, would favorably impact our effective tax rate was $30.3 million and $35.7 million, respectively.

We accrue interest and penalties associated with uncertain tax positions as part of income tax expense.

We conduct business and file tax returns in numerous countries, states, and local jurisdictions. The U.S. Internal Revenue Service (“IRS”) has completed its audit for tax years through fiscal 2009 and all resulting significant items for fiscal 2009 and prior years have been settled with the IRS. Other major jurisdictions where we conduct business generally have statutes of limitations ranging from 3 to 5 years.

We estimate that it is reasonably possible that the amount of gross unrecognized tax benefits will decrease by up to $9 million over the next twelve months due to various federal, state, and foreign audit settlements and the expiration of statutes of limitations.

The change in the unrecognized tax benefits for the year ended May 27, 2012 was:

	2012
Beginning balance on May 29, 2011	$	56.5
Increases from positions established during prior periods		1.2
Decreases from positions established during prior periods		(0.4	)
Increases from positions established during the current period		4.3
Decreases relating to settlements with taxing authorities		(6.7	)
Reductions resulting from lapse of applicable statute of limitation		(6.1	)
Other adjustments to liability		(0.1	)
Ending balance on May 27, 2012	$	48.7

We have approximately $62.7 million of foreign net operating loss carryforwards ($40.9 million expire between fiscal 2013 and 2033 and $21.7 million have no expiration dates). Substantially all of our foreign tax credits will expire in fiscal 2018. State tax credits of approximately $16.7 million expire in various years ranging from fiscal 2013 to 2017.

We have recognized a valuation allowance for the portion of the net operating loss carryforwards, tax credit carryforwards, and other deferred tax assets we believe are not more likely than not to be realized. The net impact on income tax expense related to changes in the valuation allowance for fiscal 2012 was a benefit of $7.1 million. For fiscal 2011 and 2010, changes in the valuation allowance were a charge of $2.1 million and a benefit of $4.6 million, respectively. The current year change principally relates to decreases to the valuation allowances for foreign net operating losses, offset by increases related to state net operating losses and credits.

As of May 27, 2012, undistributed earnings of the Company’s foreign subsidiaries amounted to approximately $400 million. Those earnings are considered to be indefinitely reinvested and accordingly, no U.S. federal income taxes have been provided thereon. We have not provided U.S. deferred taxes on cumulative earnings of non-U.S. affiliates and associated companies that the Company considers to be reinvested indefinitely. It is not practicable to estimate the amount of U.S. income taxes that would be incurred in the event that we were to repatriate the cumulative earnings of non-U.S. affiliates and associated companies. Deferred taxes are provided for earnings of non-U.S. affiliates and associated companies when we determine that such earnings are no longer indefinitely reinvested.

During the fourth quarter of fiscal 2012, we determined that, upon adoption of accounting guidance for income taxes in 1993, we failed to establish deferred income tax liabilities for the difference between the book bases and income tax bases of a certain subset of our brands that had been acquired as part of a business combination completed in 1990. Accordingly, we have retrospectively corrected our consolidated balance sheets and consolidated statements of common stockholders’ equity by increasing noncurrent liabilities and decreasing retained earnings by $31.8 million for all periods presented.