Income Taxes

The following table summarizes the provision/(benefit) for U.S. federal, state and foreign taxes on income from continuing operations.



	2012			2011			2010
	(In thousands)
Current:
U.S. federal	$	110,354		$	38,686		$	(24,446	)
State	12,048			14,507			(809		)
Foreign	215,949			161,303			163,241
	338,351			214,496			137,986
Deferred:
U.S. federal	(16,262		)	123,601			165,141
State	4,186			(4,318		)	8,141
Foreign	(82,740		)	34,442			47,246
	(94,816		)	153,725			220,528
Provision for income taxes	$	243,535		$	368,221		$	358,514

Tax benefits related to stock options and other equity instruments recorded directly to additional capital totaled $16.8 million in Fiscal 2012, $21.4 million in Fiscal 2011 and $9.3 million in Fiscal 2010.

The components of income from continuing operations before income taxes consist of the following:



	2012		2011		2010
	(In thousands)
Domestic	$	312,197	$	463,142	$	499,059
Foreign	871,246		911,027		791,395
From continuing operations	$	1,183,443	$	1,374,169	$	1,290,454

The differences between the U.S. federal statutory tax rate and the Company’s consolidated effective tax rate on continuing operations are as follows:



	2012		2011		2010
U.S. federal statutory tax rate	35.0	%	35.0	%	35.0	%
Tax on income of foreign subsidiaries	(8.7	)	(5.6	)	(4.3	)
Changes in valuation allowances	2.6		(0.2	)	0.2
Earnings repatriation	2.1		3.0		1.2
Tax free interest	(5.6	)	(4.2	)	(4.6	)
Effects of revaluation of tax basis of foreign assets	(3.3	)	(1.6	)	(0.5	)
Audit settlements and changes in uncertain tax positions	(2.1	)	—		(1.3	)
Other	0.6		0.4		2.1
Effective tax rate	20.6	%	26.8	%	27.8	%

The decrease in the effective tax rate is primarily the result of the increased benefits from the revaluation of the tax basis of foreign assets, the reversal of an uncertain tax position liability due to the expiration of the statute of limitations in a foreign tax jurisdiction, the beneficial resolution of a foreign tax case, and lower tax on the income of foreign subsidiaries primarily resulting from a statutory tax rate reduction in the U.K. These benefits were partially offset by the current year expense for changes in valuation allowances. The decrease in the effective tax rate in Fiscal 2011 was primarily the result of increased benefits from foreign tax planning and increased tax exempt foreign income, partially offset by higher taxes on repatriation of earnings. The effective tax rate in Fiscal 2010 was impacted by higher taxes on the income of foreign subsidiaries partially offset by lower earnings repatriation costs.

During the second quarter of Fiscal 2012, a foreign subsidiary of the Company exercised a tax option under local law to revalue certain of its intangible assets, increasing the local tax basis by approximately $220.2 million. This revaluation resulted in a reduction in Fiscal 2012 tax expense, fully recognized in Fiscal 2012, of $34.9 million reflecting the deferred tax benefit from the higher tax basis partially offset by the current tax liability arising from this revaluation of $34.8 million. The subsidiary paid $10.4 million of the $34.8 million during Fiscal 2012 and will pay approximately $13.9 million in Fiscal 2013 with the remainder due during Fiscal 2014. The tax benefit from the higher basis amortization will result in a reduction in cash taxes over the five year amortization period totaling approximately $69.1 million partially offset by the $34.8 million aforementioned tax payments.

The following table and note summarize deferred tax (assets) and deferred tax liabilities as of April 29, 2012 and April 27, 2011.



	2012			2011
	(In thousands)
Depreciation/amortization	$	910,987		$	916,716
Benefit plans	59,647			93,916
Deferred income	96,472			126,917
Financing costs	117,670			118,118
Other	48,371			48,839
Deferred tax liabilities	1,233,147			1,304,506
Operating loss carryforwards	(141,358		)	(120,261		)
Benefit plans	(195,697		)	(168,001		)
Depreciation/amortization	(147,745		)	(86,044		)
Tax credit carryforwards	(81,703		)	(46,452		)
Deferred income	(20,286		)	(24,235		)
Other	(96,502		)	(105,327		)
Deferred tax assets	(683,291		)	(550,320		)
Valuation allowance	90,553			64,386
Net deferred tax liabilities	$	640,409		$	818,572

The Company also has foreign deferred tax assets and valuation allowances of $127.7 million as of April 29, 2012, each related to statutory increases in the capital tax bases of certain internally generated intangible assets for which the probability of realization is remote.

The Company records valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. When assessing the need for valuation allowances, the Company considers future taxable income and ongoing prudent and feasible tax planning strategies. Should a change in circumstances lead to a change in judgment about the realizability of deferred tax assets in future years, the Company would adjust related valuation allowances in the period that the change in circumstances occurs, along with a corresponding increase or charge to income.

The resolution of tax reserves and changes in valuation allowances could be material to the Company’s results of operations for any period, but is not expected to be material to the Company’s financial position.

At the end of Fiscal 2012, foreign operating loss carryforwards totaled $493.4 million. Of that amount, $252.7 million expire between 2013 and 2028; the other $240.7 million do not expire. Deferred tax assets of $49.1 million have been recorded for foreign tax credit carryforwards. These credit carryforwards expire between 2020 and 2022. Deferred tax assets of $11.9 million have been recorded for state operating loss carryforwards. These losses expire between 2013 and 2032. Additionally, the Company has incurred losses in a foreign jurisdiction where realization of the future economic benefit is so remote that the benefit is not reflected as a deferred tax asset.

The net change in the Fiscal 2012 valuation allowance shown above is an increase of $26.2 million. The increase was primarily due to the recording of additional valuation allowance for foreign loss carryforwards that are not expected to be utilized. The net change in the Fiscal 2011 valuation allowance was an increase of $1.9 million. The increase was primarily due to the recording of additional valuation allowance for foreign loss carryforwards that are not expected to be utilized, partially offset by the release of valuation allowance related to state tax loss and credit carryforwards that are now expected to be utilized. The net change in the Fiscal 2010 valuation allowance was an increase of $3.4 million. The increase was primarily due to the recording of additional valuation allowance for foreign loss carryforwards that are not expected to be utilized prior to their expiration date, partially offset by a reduction in unrealizable net state deferred tax assets.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:



	2012			2011			2010
	(In millions)
Balance at the beginning of the fiscal year	$	70.7		$	57.1		$	86.6
Increases for tax positions of prior years	5.2			13.5			3.7
Decreases for tax positions of prior years	(18.0		)	(26.0		)	(35.4		)
Increases based on tax positions related to the current year	3.7			10.8			10.4
Increases due to business combinations	—			26.9			—
Decreases due to settlements with taxing authorities	(2.2		)	(5.4		)	(0.8		)
Decreases due to lapse of statute of limitations	(6.7		)	(6.2		)	(7.4		)
Balance at the end of the fiscal year	$	52.7		$	70.7		$	57.1

The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $38.9 million and $56.5 million, on April 29, 2012 and April 27, 2011, respectively.

The Company classifies interest and penalties on tax uncertainties as a component of the provision for income taxes. For Fiscal 2012, the total amount of net interest and penalty expense included in the provision for income taxes was a benefit of $9.5 million and $4.7 million, respectively. For Fiscal 2011, the total amount of net interest and penalty expense included in the provision for income taxes was a benefit of $1.3 million and $0.1 million, respectively. For Fiscal 2010, the total amount of net interest and penalty expense included in the provision for income taxes was a benefit of $5.2 million and $1.0 million, respectively. The total amount of interest and penalties accrued as of April 29, 2012 was $16.0 million and $13.8 million, respectively. The corresponding amounts of accrued interest and penalties at April 27, 2011 were $27.3 million and $21.1 million, respectively.

It is reasonably possible that the amount of unrecognized tax benefits will decrease by as much as $26.2 million in the next 12 months primarily due to the expiration of statutes in various foreign jurisdictions along with the progression of state and foreign audits in process.

The provision for income taxes consists of provisions for federal, state and foreign income taxes. The Company operates in an international environment with significant operations in various locations outside the U.S. Accordingly, the consolidated income tax rate is a composite rate reflecting the earnings in various locations and the applicable tax rates. In the normal course of business the Company is subject to examination by taxing authorities throughout the world, including such major jurisdictions as Australia, Canada, Italy, the United Kingdom and the United States. The Company has substantially concluded all national income tax matters for years through Fiscal 2009 for the U.S. and United Kingdom, and through Fiscal 2007 for Australia, Canada, and Italy.

Undistributed earnings of foreign subsidiaries considered to be indefinitely reinvested or which may be remitted tax free in certain situations, amounted to $5.1 billion at April 29, 2012. The Company has not determined the deferred tax liability associated with these undistributed earnings, as such determination is not practicable.