INCOME TAXES

9 Months Ended

Oct. 01, 2011

INCOME TAXES

INCOME TAXES

(14) INCOME TAXES

Unrecognized Tax Benefits

As of October 1, 2011, we had gross unrecognized tax benefits of $84.6 (net unrecognized tax benefits of $65.8), of which $63.7, if recognized, would impact our effective tax rate from continuing operations.

We classify interest and penalties related to unrecognized tax benefits as a component of our income tax provision. As of October 1, 2011, gross accrued interest excluded from the amounts above totaled $13.0 (net accrued interest of $9.9). There were no significant penalties recorded during the three and nine months ended October 1, 2011 or October 2, 2010.

Based on the outcome of certain examinations or as a result of the expiration of statutes of limitations for certain jurisdictions, we believe that within the next 12 months it is reasonably possible that our previously unrecognized tax benefits could decrease by approximately $30.0 to $40.0. The previously unrecognized tax benefits relate to a variety of tax issues including the deductibility of interest expense in certain jurisdictions and tax matters relating to prior acquisitions or dispositions.

Uncertain Tax Positions and Other Tax Matters

We perform reviews of our income tax positions on a continuous basis and accrue for potential uncertain positions when we determine that an uncertain position meets the criteria of the Income Taxes Topic of the Codification. Accruals for these uncertain tax positions are recorded in “Income taxes payable” and “Deferred and other income taxes” in the accompanying condensed consolidated balance sheets based on the expectation as to the timing of when the matters will be resolved. As events change and resolution occurs, these accruals are adjusted, such as in the case of audit settlements with taxing authorities.

During the third quarter of 2011, we adopted an alternative method of allocating certain expenses between foreign and domestic sources for federal income tax purposes. As a result of this method change, we have determined that it is more likely than not that we will be able to utilize our existing foreign tax credits within the remaining carryforward period. Accordingly, during the third quarter of 2011, we reversed the valuation allowance on our foreign tax credit carryforwards, resulting in an income tax benefit of $27.8. This favorable adjustment was partially offset by $6.9 of federal income taxes that were recorded in connection with our plan to repatriate a portion of the earnings of a foreign subsidiary.

During the second quarter of 2010, the IRS completed the field examination of our 2006 and 2007 federal income tax returns and issued a Revenue Agent’s report (“RAR”). We disagreed with and have protested certain adjustments to the Appeals Office of the IRS. Upon issuance of the RAR, we reduced a portion of our valuation allowance and our liability for uncertain tax positions to reflect amounts determined to be effectively settled or that satisfied the more likely than not threshold, resulting in the recognition of income tax benefits of $22.0 and $7.3 to continuing and discontinued operations, respectively.

The effective income tax rate for the nine months ended October 2, 2010 was impacted unfavorably by a domestic charge of $6.2 associated with the taxation of prescription drug costs for retirees under Medicare Part D as a result of the first quarter 2010 enactment of the PPAC Act.

The IRS currently is performing an audit of our 2008 and 2009 federal income tax returns. At this stage, the outcome of the audit is uncertain; however, we believe that any contingencies are adequately provided for. We reasonably expect to conclude this examination within the next twelve months.

State income tax returns generally are subject to examination for a period of three to five years after filing the respective tax returns. The impact on such tax returns of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states. We have various state income tax returns in the process of examination, administrative appeals or litigation. We believe that any uncertain tax positions related to these examinations have been adequately provided for.

We have various foreign income tax returns under examination. Significant jurisdictions with tax examinations underway include: Canada for the 2000 to 2002 and 2006 tax returns, Germany for the 2005 to 2009 tax returns, and the United Kingdom for the 2009 tax return. We believe that any uncertain tax positions related to these examinations have been adequately provided for. During the second quarter of 2011, we were notified of the determination rendered on a Canadian federal income tax appeal and recognized a $2.5 tax benefit upon the effective settlement of the various issues. The outcome of the provincial taxes related to these matters is still pending.

An unfavorable resolution on one or more of the above matters could have a material adverse effect on our results of operations or cash flows in the quarter and year in which an adjustment is recorded or the tax is due or paid. As audits and examinations are still in process or we have not yet reached the final stages of the appeals process for the above matters, the timing of the ultimate resolution and any payments that may be required for the above matters cannot be determined at this time.

Upon the conclusion of our disposition activities discussed in Note 3 to these condensed consolidated financial statements, we may recognize an additional income tax provision or benefit, generally as part of discontinued operations.