Taxes On Earnings

12 Months Ended

Jul. 31, 2011

Taxes On Earnings

Taxes On Earnings

12.  Taxes on Earnings

The provision for income taxes on earnings from continuing operations consists of the following:

	2011	2010	2009
Income taxes:
Currently payable
Federal	$      215	$      253	$      145
State	27	46	12
Non-U.S.	78	45	46
	320	344	203
Deferred
Federal	47	38	142
State	(2)	1	9
Non-U.S.	1	15	(7)
	46	54	144
	$366	$398	$347
Earnings from continuing operations before income taxes:
United States	$      944	$   1,051	$      976
Non-U.S.	224	191	103
	$   1,168	$   1,242	$   1,079

The following is a reconciliation of the effective income tax rate on continuing operations with the U.S. federal statutory income tax rate:

	2011	2010	2009
Federal statutory income tax rate	35.0%	35.0%	35.0%
State income taxes (net of federal tax benefit)	1.4	2.5	1.7
Tax effect of international items	(2.1)	(2.5)	(0.8)
Settlement of tax contingencies	(0.5)	(0.7)	(1.0)
Federal manufacturing deduction	(1.8)	(1.3)	(1.0)
Other	(0.7)	(1.0)	(1.7)
Effective income tax rate	31.3%	32.0%	32.2%

During 2011, the company recorded a tax benefit of $8 following the finalization of tax audits.

In the third quarter of 2010, the company recorded deferred tax expense of $10 due to the enactment of U.S. health care legislation in March 2010. The law changed the tax treatment of subsidies to companies that provide prescription drug benefits to retirees. Accordingly, the company recorded the non-cash charge to reduce the value of the deferred tax asset associated with the subsidy.

In 2010, the company recorded a tax benefit of $9 following the finalization of tax audits. The company recorded an additional tax benefit of $2 during the year related to the resolution of other tax contingencies.

In 2009, the company recorded a tax benefit of $11 following the finalization of tax audits.

Deferred tax liabilities and assets are comprised of the following:

	2011	2010
Depreciation	$    253	$    221
Amortization	474	449
Other	14	13
Deferred tax liabilities	741	683
Benefits and compensation	307	319
Pension benefits	93	134
Tax loss carryforwards	84	67
Capital loss carryforwards	122	101
Other	83	76
Gross deferred tax assets	689	697
Deferred tax asset valuation allowance	(156)	(123)
Net deferred tax assets	533	574
Net deferred tax liability	$    208	$    109

At July 31, 2011, U.S. and non-U.S. subsidiaries of the company have tax loss carryforwards of approximately $395. Of these carryforwards, $163 expire between 2012 and 2028, and $232 may be carried forward indefinitely. The current statutory tax rates in these countries range from 20% to 35%. At July 31, 2011, deferred tax asset valuation allowances have been established to offset $132 of these tax loss carryforwards. Additionally, at July 31, 2011, non-U.S. subsidiaries of the company have capital loss carryforwards of approximately $406, which are fully offset by deferred tax asset valuation allowances.

The net change in the deferred tax asset valuation allowance in 2011 was an increase of $33. The increase was primarily due to the impact of currency and recognition of additional valuation allowances on foreign loss carryforwards. The net change in the valuation allowance in 2010 was an increase of $15. The increase was primarily due to the impact of currency and the recognition of additional valuation allowances on foreign loss carryforwards that are not expected to be utilized prior to the expiration date. The net change in the valuation allowance in 2009 was a decrease of $7, primarily due to currency.

As of July 31, 2011, U.S. income taxes have not been provided on approximately $420 of undistributed earnings of non-U.S. subsidiaries, which are deemed to be permanently reinvested. It is not practical to estimate the tax liability that might be incurred if such earnings were remitted to the U.S.

A reconciliation of the activity related to unrecognized tax benefits follows:

	2011	2010	2009
Balance at beginning of year	$    36	$    42	$    54
Increases related to prior-year tax positions	6	14	—
Decreases related to prior-year tax positions	(4)	(11)	(11)
Increases related to current-year tax positions	9	4	4
Settlements	—	(11)	(2)
Lapse of statute	(4)	(2)	(3)
Balance at end of year	$    43	$    36	$    42

As of July 31, 2011, August 1, 2010, and August 2, 2009, there were $17, $22, and $28, respectively, of unrecognized tax benefits that if recognized would affect the annual effective tax rate. The total amount of unrecognized tax benefits can change due to audit settlements, tax examination activities, statute expirations and the recognition and measurement criteria under accounting for uncertainty in income taxes. The company is unable to estimate what this change could be within the next twelve months, but does not believe it would be material to the financial statements.

The company's accounting policy with respect to interest and penalties attributable to income taxes is to reflect any expense or benefit as a component of its income tax provision. The total amount of interest and penalties recognized in the Consolidated Statements of Earnings was a benefit of $1 in 2011, an expense of $2 in 2010 and a benefit of $1 in 2009. The total amount of interest and penalties recognized in the Consolidated Balance Sheets as of July 31, 2011, and August 1, 2010, was $8 and $9, respectively.

None of the unrecognized tax benefit liabilities, including interest and penalties, are expected to be settled within the next twelve months. The $51 and $45 of unrecognized tax benefit liabilities, including interest and penalties, were reported as other non-current liabilities in the Consolidated Balance Sheets as of July 31, 2011, and August 1, 2010, respectively.

The company does business globally and, as a result, files income tax returns in the U.S. federal jurisdiction and various state and non-U.S. jurisdictions. In the normal course of business, the company is subject to examination by taxing authorities throughout the world, including such major jurisdictions as the United States, Australia, Canada, Belgium, France and Germany. The 2011 tax year is currently under audit by the IRS. In addition, several state income tax examinations are in progress for fiscal years 2001 to 2009.

With limited exceptions, the company has been audited for income tax purposes in Canada and France through fiscal year 2005, in Germany through fiscal year 2007, and in Belgium and Australia through fiscal year 2009.