2005 Financial Review

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 17 - Income Taxes

	Years Ended December 31,
(In millions)		2005	2004	2003
Income from continuing operations before income taxes
U.S.	$	45.1	56.5	34.7
Foreign		46.7	55.6	39.6
Total	$	91.8	112.1	74.3
Income tax expense (benefit)
Current
U.S. federal	$	(0.3)	0.1	17.7
State		1.9	5.4	1.0
Foreign		36.1	26.5	14.8
		37.7	32.0	33.5
Deferred
U.S. federal		10.0	13.2	(12.6)
State		(2.1)	-	3.7
Foreign		3.9	(4.6)	11.8
		11.8	8.6	2.9
	$	49.5	40.6	36.4

 

The U.S. federal current income tax provision on continuing operations in 2003 was offset by U.S. federal current tax benefits included in the loss from discontinued operations.

	Years Ended December 31,
(In millions)		2005	2004	2003
Comprehensive provision (benefit) for income taxes allocable to
Continuing operations	$	49.5	40.6	36.4
Discontinued operations		(3.7)	32.9	27.3
Change in accounting principle		(0.9)	-	-
Other comprehensive income (loss)		(13.6)	(3.9)	15.9
Shareholders’ equity		(15.1)	(4.7)	(0.2)
	$	16.2	64.9	79.4

 

The components of the net deferred tax asset are as follows:

	December 31,
(In millions)		2005	2004
Deferred tax assets
Postretirement benefits other than pensions	$	115.6	125.2
Pension liabilities		78.1	56.0
Multi-employer pension plan withdrawal liabilities		10.9	12.8
Workers’ compensation and other claims		42.4	46.8
Deferred revenue		69.1	60.4
Deferred tax on investment in BAX Global		9.2	-
Other assets and liabilities		70.0	137.3
Net operating loss carryforwards		44.1	78.4
Alternative minimum and other tax credits		79.4	56.1
Subtotal		518.8	573.0
Valuation allowances		(42.1)	(55.8)
Total deferred tax assets		476.7	517.2
Deferred tax liabilities
Property and equipment, net		84.3	130.1
Prepaid pension assets		6.2	9.5
Other prepaid assets		25.3	20.4
Other assets and miscellaneous		12.3	33.4
Total deferred tax liabilities		128.1	193.4
Net deferred tax asset	$	348.6	323.8
Included in:
Current assets	$	174.0	116.0
Noncurrent assets		196.9	234.7
Current liabilities, included in accrued liabilities		(3.5)	(0.9)
Noncurrent liabilities		(18.8)	(26.0)
Net deferred tax asset (a)	$	348.6	323.8

(a)

Includes a net deferred tax asset of $26.6 million in 2004 related to BAX Global.

The valuation allowances relate to deferred tax assets in various state and non-U.S. jurisdictions. Based on the Company’s historical and expected future taxable earnings, and a consideration of available tax-planning strategies, management believes it is more likely than not that the Company will realize the benefit of the existing deferred tax assets, net of valuation allowances, at December 31, 2005.

The following table reconciles the difference between the actual tax provision from continuing operations and the amounts obtained by applying the statutory U.S. federal income tax rate of 35% in each year to the income from continuing operations before income taxes.

	Years Ended December 31,
(In millions)		2005	2004	2003
Income tax expense computed at 35% statutory rate	$	32.1	39.2	26.0
Increases (reductions) in taxes due to:
Adjustments to valuation allowances		18.6	2.1	15.5
State income taxes, net		1.9	2.7	3.1
Medicare subsidy of postretirement costs		(2.1)	(2.0)	-
Repatriation of foreign earnings under the AJCA		2.9	-	-
Foreign income taxes		4.7	(0.3)	(0.5)
Foreign tax credit carryover		(3.9)	-	-
Taxes on undistributed earnings of foreign affiliates		0.7	(1.7)	1.2
Changes in accrual for tax contingencies		(3.8)	1.2	(2.0)
Adjustments to current and deferred tax accounts		(0.9)	(0.3)	(5.8)
Other		(0.7)	(0.3)	(1.1)
Actual income tax expense on continuing operations	$	49.5	40.6	36.4

 

Adjustments to the beginning-of-year valuation allowance of $10.0 million in 2005, $1.4 million in 2004 and $15.1 million in 2003 related primarily to several international operations with a recent history of losses. The valuation allowance also increased by $8.6 million in 2005, $0.7 million in 2004 and $0.4 million in 2003 to offset the net increase in deferred tax assets in jurisdictions where the Company had previously concluded that valuation allowances were necessary. The valuation allowances were required due to the Company’s assessment that these assets did not meet the more-likely-than-not recognition criteria of SFAS 109.

Adjustments were made to the Company’s current and deferred tax assets and liabilities in each of the prior three years based on a detailed analysis conducted by the Company. The Company also recognized tax benefits related to uncertain tax positions upon favorable settlements of issues relating primarily to the Company’s state tax returns in 2005 and U.S. federal tax returns in 2003.

As of December 31, 2005, the Company has not recorded U.S. federal deferred income taxes on approximately $145 million of undistributed earnings of its foreign subsidiaries and equity affiliates related to continuing operations. It is expected that these earnings will be permanently reinvested in operations outside the U.S. It is not practical to compute the estimated deferred tax liability on these earnings.

The Company repatriated cash of $71.2 million in 2005, including $22.4 million related to BAX Gobal’s non-U.S. subsidiaries, under the repatriation provision of the American Jobs Creation Act of 2004. The Company recognized $3.6 million of additional income tax expense in 2005, including $0.7 million included as a component of discontinued operations, related to the repatriation.

The Company’s U.S. entities file a consolidated U.S. federal income tax return.

As of December 31, 2005, the Company had approximately $72 million of alternative minimum tax credits and $7.4 million of foreign tax credits available to offset future U.S. federal income taxes. Under current tax law, the carryforward period for the alternative minimum tax credits is unlimited, and the 10-year carryforward period for the foreign tax credits will expire in 2013 with respect to $2.9 million, in 2014 with respect to $2.5 million, and in 2015 with respect to $2.0 million.

The gross amount of the net operating loss carryforwards as of December 31, 2005 was $146.3 million related to continuing operations. The tax benefit of net operating loss carryforwards, before valuation allowances, as of December 31, 2005 was $44.1 million, and expire as follows:

(In millions)		Federal	State	Foreign	Total
Year of expiration:
2006-2010	$	-	0.3	6.2	6.5
2011-2015		-	-	1.6	1.6
2016 and thereafter		-	1.2	-	1.2
Unlimited		-	-	34.8	34.8
	$	-	1.5	42.6	44.1

 

The Company and its subsidiaries are subject to tax examinations in various U.S. and foreign jurisdictions and the Company has accrued approximately $13 million for related contingencies at December 31, 2005. While it is difficult to predict the final outcome of the various issues that may arise during an examination, the Company believes that it has adequately provided for all contingent income tax liabilities, penalties and interest.