Income Taxes

12 Months Ended

Dec. 31, 2011

Income Taxes [Abstract]

Income Taxes

7. Income Taxes

The domestic and foreign components of our income before income taxes and noncontrolling interests are as follows:

	Year Ended December 31,
	2011		2010		2009
	(Millions)
U.S. income (loss) before income taxes	$	55	$	(45)	$	(118	)
Foreign income before income taxes		216		177		77
Income (loss) before income taxes and noncontrolling interests	$	271	$	132	$	(41	)

Following is a comparative analysis of the components of income tax expense:

	Year Ended December 31,
	2011			2010		2009
	(Millions)
Current —
U.S. federal	$	—		$	—	$	(2	)
State and local		2			1		4
Foreign		91			64		35
		93			65		37
Deferred —
U.S. federal		—			—		(18	)
State and local		—			—		(3	)
Foreign		(5	)		4		(3	)
		(5	)		4		(24	)
Income tax expense	$	88		$	69	$	13

Following is a reconciliation of income taxes computed at the statutory U.S. federal income tax rate (35 percent for all years presented) to the income tax expense reflected in the statements of income (loss):

	Year Ended December 31,
	2011			2010			2009
	(Millions)
Income tax expense (benefit) computed at the statutory U.S. federal income tax rate	$	95		$	46		$	(14	)
Increases (reductions) in income tax expense resulting from:
Foreign income taxed at different rates		(14	)		(16	)		14
Taxes on repatriation of dividends		6			4			4
State and local taxes on income, net of U.S. federal income tax benefit		2			2			2
Changes in valuation allowance for tax loss carryforwards and credits		(11	)		16			5
Foreign tax holidays		(4	)		(5	)		(3	)
Investment and R&D tax credits		(4	)		(2	)		(5	)
Foreign earnings subject to U.S. federal income tax		6			5			3
Adjustment of prior years taxes		—			4			—
Impact of foreign tax law changes		—			(1	)		2
Tax contingencies		3			12			6
Goodwill impairment		3			—			—
Other		6			4			(1	)
Income tax expense	$	88		$	69		$	13

The components of our net deferred tax assets were as follows:

	December 31,
	2011			2010
	(Millions)
Deferred tax assets —
Tax loss carryforwards:
U.S. federal	$	41		$	96
State		45			43
Foreign		57			56
Investment tax credit benefits		45			46
Postretirement benefits other than pensions		54			52
Pensions		79			55
Bad debts		3			3
Sales allowances		6			6
Payroll and other accruals		98			93
Valuation allowance		(225	)		(247	)
Total deferred tax assets		203			203
Deferred tax liabilities —
Tax over book depreciation		65			82
Other		62			54
Total deferred tax liabilities		127			136
Net deferred tax assets	$	76		$	67

Certain amounts in the 2010 presentation were reclassified to conform to the current year presentation.

U.S. and state tax loss carryforwards have been presented net of uncertain tax positions, that if realized, would reduce tax loss carryforwards in 2011 and 2010 by $53 million and $9 million, respectively.

Following is a reconciliation of deferred taxes to the deferred taxes shown in the balance sheet:

	December 31,
	2011			2010
	(Millions)
Balance Sheet:
Current portion — deferred tax asset	$	40		$	38
Non-current portion — deferred tax asset		92			92
Current portion — deferred tax liability shown in other current liabilities		(5	)		(7	)
Non-current portion — deferred tax liability		(51	)		(56	)
Net deferred tax assets	$	76		$	67

As a result of the valuation allowances recorded for $225 million and $247 million at December 31, 2011 and 2010, respectively, we have potential tax assets that were not recognized on our balance sheet. These unrecognized tax assets resulted primarily from U.S. tax loss carryforwards, foreign tax loss carryforwards, foreign investment tax credits and U.S. state net operating losses that are available to reduce future U.S., U.S. state and foreign tax liabilities.

We reported income tax expense of $88 million, $69 million and $13 million in the years ending 2011, 2010 and 2009, respectively. The tax expense recorded in 2011 differs from the expense that would be recorded using a U.S. Federal statutory rate of 35 percent due to a net tax benefit of $7 million primarily related to U.S. taxable income with no associated tax expense due to our net operating loss (“NOL”) carryforward and income generated in lower tax rate jurisdictions, partially offset by the impact of recording a valuation allowance against the tax benefit for losses in certain foreign jurisdictions and taxes on repatriation of foreign earnings.

We evaluate our deferred income taxes quarterly to determine if valuation allowances are required or should be adjusted. U.S. GAAP requires that companies assess whether valuation allowances should be established against their deferred tax assets based on consideration of all available evidence, both positive and negative, using a “more likely than not” standard. This assessment considers, among other matters, the nature, frequency and amount of recent losses, the duration of statutory carryforward periods, and tax planning strategies. In making such judgments, significant weight is given to evidence that can be objectively verified.

Valuation allowances have been established for deferred tax assets based on a “more likely than not” threshold. The ability to realize deferred tax assets depends on our ability to generate sufficient taxable income within the carryforward periods provided for in the tax law for each tax jurisdiction. We have considered the following possible sources of taxable income when assessing the realization of our deferred tax assets:

• Future reversals of existing taxable temporary differences;

• Taxable income or loss, based on recent results, exclusive of reversing temporary differences and carryforwards;

• Tax-planning strategies; and

• Taxable income in prior carryback years if carryback is permitted under the relevant tax law.

In 2008, given our historical losses in the U.S., we concluded that our ability to fully utilize our NOLs was limited, as we were required to project the continuation of the negative economic environment at that time and the impact of the negative operating environment on our tax planning strategies. As a result, we recorded a valuation allowance against all of our U.S. deferred tax assets except for our tax planning strategies which have not yet been implemented and which do not depend upon generating future taxable income. We carry deferred tax assets in the U.S. of $90 million, as of December 31, 2011, relating to the expected utilization of those NOLs. The recording of a valuation allowance does not impact the amount of the NOL that would be available for federal and state income tax purposes in future periods. The federal NOLs expire beginning in tax years ending in 2021 through 2029. The state NOLs expire in various tax years through 2029.

If our operating performance continues to improve on a sustained basis, our conclusion regarding the need for a U.S. valuation allowance could change, resulting in the reversal of some or all of the valuation allowance in the future. The charge to establish the U.S. valuation allowance also includes items related to the losses allocable to certain state jurisdictions where it was determined that tax attributes related to those jurisdictions were potentially not realizable. In addition, the charge to establish the U.S. valuation allowance eliminated the need for certain tax reserves which would need to be recorded if the valuation allowance was reversed. If we were to reverse our U.S. valuation allowance as of December 31, 2011, the impact on earnings would approximate $147 million.

In prior years, we recorded a valuation allowance against deferred tax assets generated by taxable losses in the U.S. as well as certain other foreign jurisdictions. Our provision for income taxes will include no tax benefit with respect to losses incurred and no tax expense with respect to income generated in these jurisdictions until the respective valuation allowance is eliminated. In certain foreign jurisdictions, we have recorded a tax benefit on NOLs and tax credits with unlimited lives that are supported by tax actions and forecasted profitability. If the tax actions are not successful or losses are incurred, we may need to record a valuation allowance in a future period. We have recorded net deferred tax assets of approximately $23 million in these jurisdictions as of December 31, 2011. These actions will cause variability in our effective tax rate.

We do not provide for U.S. income taxes on unremitted earnings of foreign subsidiaries, except for the earnings of certain of our China operations, as our present intention is to reinvest the unremitted earnings in our foreign operations. Unremitted earnings of foreign subsidiaries were approximately $698 million at December 31, 2011. We estimated that the amount of U.S. and foreign income taxes that would be accrued or paid upon remittance of the assets that represent those unremitted earnings was $269 million.

We have tax sharing agreements with our former affiliates that allocate tax liabilities for prior periods and establish indemnity rights on certain tax issues.

U.S. GAAP provides that a tax benefit from an uncertain tax position may be recognized when it is “more likely than not” that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits.

A reconciliation of our uncertain tax positions is as follows:

	2011			2010			2009
	(Millions)
Uncertain tax positions —
Balance January 1	$	111		$	96		$	83
Gross increases in tax positions in current period		19			23			17
Gross increases in tax positions in prior period		3			4			16
Gross decreases in tax positions in prior period		(10	)		(6	)		—
Gross decreases — settlements		—			(2	)		(17	)
Gross decreases — statute of limitations expired		(4	)		(4	)		(3	)
Balance December 31	$	119		$	111		$	96

Included in the balance of uncertain tax positions were $36 million at both December 31, 2011 and 2010, and $28 million in 2009, of tax benefits, that if recognized, would affect the effective tax rate. We recognize accrued interest and penalties related to unrecognized tax benefits as income tax expense. Related to the uncertain tax positions noted above, we accrued penalties of $2 million in 2009. No penalties were accrued in 2011 and 2010. Additionally, we accrued interest related to uncertain tax positions of $2 million in 2011, less than one million in 2010, and zero in 2009. Our liability for penalties was $2 million at December 31, 2011 and $3 million at both December 31, 2010 and 2009, respectively, and our liability for interest was $7 million, $5 million and $4 million at December 31, 2011, 2010 and 2009, respectively.

Our uncertain tax position at December 31, 2011 and 2010 included foreign exposures relating to the disallowance of deductions, global transfer pricing and various other issues. We believe it is reasonably possible that a decrease of up to $4 million in unrecognized tax benefits related to the expiration of foreign statute of limitations and the conclusion of foreign income tax examinations may occur within the coming year.

We are subject to taxation in the U.S. and various state and foreign jurisdictions. As of December 31, 2011, our tax years open to examination in primary jurisdictions are as follows:

	Open To  Tax Year
United States — due to NOL		1998
Spain		2003
Germany		2006
Canada		2007
Belgium		2009
United Kingdom		2010