Income Taxes

9 Months Ended

Sep. 30, 2011

Income Taxes [Abstract]

Income Taxes

Note 7. Income Taxes:

As of September 30, 2011, we had $66 million of gross unrecognized tax benefits, excluding interest and penalties that, if recognized, would be recorded as a component of income tax expense and would affect our effective tax rate. We recorded $2 million in Other current liabilities and $64 million in Other liabilities.

We recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. At September 30, 2011, we had accrued $13 million of interest and penalties.

We have several tax audits and/or litigation in process and of these, the most significant is related to ongoing tax assessments and uncertain tax positions within our European operations. While we believe our position in regard to these matters is in accordance with applicable legislation, the local tax authority is challenging our position. We have recorded a liability for unrecognized tax benefits, included in the $66 million amount above, based on our best estimate of uncertain tax positions related to these cases. There could be future events or changes in facts or circumstances that could require us to further increase our liability for unrecognized tax benefits, and if the aforementioned tax assessments are ultimately resolved against us, the resulting increase in our liability for uncertain tax benefits could have a material impact on our results of operations and cash flows in a particular period.

In addition, we have several other tax audits in process and have open tax years with various taxing jurisdictions that range primarily from 2002 to 2010. Based on currently available information, we do not believe the ultimate outcome of these tax audits and other tax positions related to open tax years, when finalized, will have a material impact on our financial position, results of operations or liquidity.

We regularly repatriate a portion of current year earnings from select non–U.S. subsidiaries. No provision is made for additional taxes on undistributed earnings of subsidiary companies that are intended and planned to be indefinitely invested in such subsidiaries. We intend to, and have plans to, reinvest these earnings indefinitely in our foreign subsidiaries to fund local operations and/or capital projects.

The effective tax rate for the three months ended September 30, 2011 was 26.9% compared with 27.4% for the three months ended September 30, 2010. The reduction in the effective tax rate for the three-month period principally reflects a U.S. R&D credit in the 2011 period.

The effective tax rate for the nine months ended September 30, 2011 was 27.2% compared with 28.0% for the nine months ended September 30, 2010. The 2011 nine month period includes a $5.8 million charge to write off deferred tax assets associated with recent U.S. state law changes enacted during the second quarter 2011. This charge was substantially offset by several other items, including approximately $3 million related to reserve reversals on uncertain tax positions, a more favorable mix of earnings and remittances and a U.S. R&D credit in the 2011 period.