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Income Taxes
 12 Months Ended
Dec. 31, 2011
Income Taxes [Abstract]  
Income Taxes

15. Income Taxes

The components of loss before income taxes were as follows (in thousands):

 

 

                         
    Years Ended December 31,  
    2011     2010     2009  

United States

   $  (268,492 )    $  (238,776 )    $ (4,385 ) 

Foreign

     (78,628 )      13,606       (193,172 ) 
   

 

 

    

 

 

    

 

 

  

Loss before income taxes

   $ (347,120 )    $ (225,170 )    $  (197,557 ) 
   

 

 

    

 

 

    

 

 

  

The provision for (benefit from) income taxes consisted of the following (in thousands):

 

 

                         
    Years Ended December 31,  
    2011     2010     2009  

Current tax provision (benefit):

                        

U.S. federal

   $ 4,029     $ 1,691     $ (2,906 ) 

State

     6,552       3,157       2,296  

Foreign

     27,309       56,623       58,842  
   

 

 

    

 

 

    

 

 

  

Total current

     37,890       61,471       58,232  
   

 

 

    

 

 

    

 

 

  

Deferred tax provision (benefit):

                        

U.S. federal

     (71,857 )      (83,752 )      903  

State

     (7,874 )      (10,110 )      (4,193 ) 

Foreign

     28,376       (34,215 )      (3,275 ) 
   

 

 

    

 

 

    

 

 

  

Total deferred

     (51,355 )      (128,077 )      (6,565 ) 
   

 

 

    

 

 

    

 

 

  

Provision for (benefit from) income taxes

   $  (13,465 )    $ (66,606 )    $  51,667  
   

 

 

    

 

 

    

 

 

  

The provision for (benefit from) income taxes for 2011, 2010 and 2009 resulted in effective tax rates on continuing operations of 3.9%, 29.6% and (26.2)%, respectively. The reasons for the differences between these effective tax rates and the U.S. statutory rate of 35% are as follows (in thousands):

 

 

                         
    Years Ended December 31,  
    2011     2010     2009  

Income taxes at U.S. federal statutory rate of 35%

   $  (121,492 )    $ (78,809 )      $ (69,145 ) 

Net state income taxes

     (538 )      (3,765 )      (1,249 ) 

Foreign taxes

     4,676       21,096       34,879  

Noncontrolling interest

     (1,103 )      3,134       (3,264 ) 

Foreign tax credits

     (11,431 )      (6,497 )      (3,129 ) 

Unrecognized tax benefits

     (741 )      (817 )      7,784  

Valuation allowances

     62,318       (1,892 )      5,044  

Goodwill impairment

     53,988       —         52,772  

Impairment of investments in non-consolidated affiliates

     —         —         25,407  

Other

     858       944       2,568  
   

 

 

    

 

 

    

 

 

  

Provision (benefit from) for income taxes

   $ (13,465 )    $  (66,606 )      $ 51,667  
   

 

 

    

 

 

    

 

 

  

 

Deferred income tax balances are the direct effect of temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities at the enacted tax rates expected to be in effect when the taxes are actually paid or recovered. The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities are as follows (in thousands):

 

 

                 
    December 31,  
    2011     2010  

Deferred tax assets:

                

Net operating loss carryforwards

   $ 246,163     $ 323,354  

Inventory

     4,942       3,950  

Alternative minimum tax credit carryforwards

     13,020       8,269  

Accrued liabilities

     14,627       11,217  

Foreign tax credit carryforwards

     100,266       88,835  

Other

     39,874       52,407  
   

 

 

    

 

 

  

Subtotal

     418,892       488,032  

Valuation allowances

     (76,066 )      (18,140 ) 
   

 

 

    

 

 

  

Total deferred tax assets

     342,826       469,892  
   

 

 

    

 

 

  

Deferred tax liabilities:

                

Property, plant and equipment

     (336,104 )      (377,049 ) 

Basis difference in the Partnership

     (69,922 )      (81,013 ) 

Goodwill and intangibles

     —         (17,987 ) 

Other

     —         (28,830 ) 
   

 

 

    

 

 

  

Total deferred tax liabilities

     (406,026 )      (504,879 ) 
   

 

 

    

 

 

  

Net deferred tax liabilities

   $ (63,200 )    $ (34,987 ) 
   

 

 

    

 

 

  

Tax balances are presented in the accompanying consolidated balance sheets as follows (in thousands):

 

 

                 
    December 31,  
    2011     2010  

Current deferred income tax assets

   $ 37,401     $ 36,093  

Intangibles and other assets

     27,789       59,585  

Accrued liabilities

     (3,543 )      (10,241 ) 

Deferred income tax liabilities

     (124,847 )      (120,424 ) 
   

 

 

    

 

 

  

Net deferred tax liabilities

   $ (63,200 )    $ (34,987 ) 
   

 

 

    

 

 

  

At December 31, 2011, we had U.S. federal net operating loss carryforwards of approximately $457.5 million that are available to offset future taxable income. If not used, the carryforwards will begin to expire in 2022. We also had approximately $282.6 million of net operating loss carryforwards in certain foreign jurisdictions (excluding discontinued operations), approximately $145.7 million of which has no expiration date, $44.0 million of which is subject to expiration from 2012 to 2015, and the remainder of which expires in future years through 2031. Foreign tax credit carryforwards of $100.3 million and alternative minimum tax credit carryforwards of $13.0 million are available to offset future payments of U.S. federal income tax. The foreign tax credits will expire in varying amounts beginning in 2013, whereas the alternative minimum tax credits may be carried forward indefinitely under current U.S. tax law.

Pursuant to Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, utilization of loss carryforwards and credit carryforwards, such as foreign tax credits, will be subject to annual limitations due to the ownership changes of both Hanover and Universal. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period. The merger resulted in such an ownership change for both Hanover and Universal. Our ability to utilize loss carryforwards and credit carryforwards against future U.S. federal taxable income and future U.S. federal income tax may be limited. The limitations may cause us to pay U.S. federal income taxes earlier; however, we do not currently expect that any loss carryforwards or credit carryforwards will expire as a result of these limitations.

We record valuation allowances when it is more likely than not that some portion or all of our deferred tax assets will not be realized. The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character and in the appropriate taxing jurisdictions in the future. If we do not meet our expectations with respect to taxable income, we may not realize the full benefit from our deferred tax assets which would require us to record a valuation allowance in our tax provision in future years.

In the third quarter of 2011, we recorded a valuation allowance of $1.3 million against our foreign tax credit deferred tax asset. While we expect to generate sufficient foreign source taxable income in the future, we no longer expect to generate sufficient overall taxable income in the future to fully use our net operating loss carryforwards and thus a portion of our foreign tax credit carryforwards before the year 2014. The foreign tax credits that expire in the year 2013 are no longer more likely than not to be realized within the 10-year carryforward period.

A $48.6 million valuation allowance was recorded against the deferred tax asset for Brazil net operating loss carryforwards for the year ended December 31, 2011. Although the net operating losses have an unlimited carryforward period, cumulative losses in recent years and losses expected in the near term result in it no longer being more likely than not that we will realize the deferred tax asset in the foreseeable future. Due to annual limitations on the utilization of Brazil net operating loss carryforwards, we would need to generate more than $400 million of taxable income in Brazil to fully realize the deferred tax asset.

We have not provided U.S. federal income taxes on indefinitely (or permanently) reinvested cumulative earnings of approximately $457.7 million generated by our non-U.S. subsidiaries. Such earnings are from ongoing operations which will be used to fund international growth. We have not recorded a deferred tax liability related to these unremitted foreign earnings as it is not practicable to estimate the amount of unrecognized deferred tax liabilities. In the event of a distribution of those earnings to the U.S. in the form of dividends, we may be subject to both foreign withholding taxes and U.S. federal income taxes net of allowable foreign tax credits.

A reconciliation of the beginning and ending amount of unrecognized tax benefits (including discontinued operations) is shown below (in thousands):

 

 

                         
    Years Ended December 31,  
    2011     2010     2009  

Beginning balance

   $  15,614     $  19,756     $  13,870  

Additions based on tax positions related to prior years

     —         —         5,886  

Reductions based on lapse of statute of limitations

     (167 )      —         —    

Reductions based on tax positions related to prior years

     (702 )      (4,142 )      —    
   

 

 

    

 

 

    

 

 

  

Ending balance

   $ 14,745     $ 15,614     $ 19,756  
   

 

 

    

 

 

    

 

 

  

We had $14.7 million, $15.6 million and $19.8 million of unrecognized tax benefits at December 31, 2011, 2010 and 2009, respectively, which if recognized would affect the effective tax rate (except for amounts that would be reflected in Income (loss) from discontinued operations, net of tax). We also have recorded $11.9 million, $10.6 million and $11.9 million of potential interest expense and penalties related to unrecognized tax benefits associated with uncertain tax positions (including discontinued operations) as of December 31, 2011, 2010 and 2009, respectively. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as reductions in income tax expense.

 

We and our subsidiaries file consolidated and separate income tax returns in the U.S. federal jurisdiction and in numerous state and foreign jurisdictions. We are subject to U.S. federal income tax examinations for tax years beginning from 1997 onward and, early in the second quarter of 2011, the Internal Revenue Service commenced an examination of our U.S. federal income tax returns for the tax years 2006, 2008 and 2009. We do not expect any tax adjustments that would have a material impact on our financial position or results of operations.

State income tax returns are generally subject to examination for a period of three to five years after filing of the returns. However, the state impact of any U.S. federal audit adjustments and amendments remain subject to examination by various states for a period of up to one year after formal notification to the states. As of December 31, 2011, we did not have any state audits underway that would have a material impact on our financial position or results of operations.

We are subject to examination by taxing authorities throughout the world, including major foreign jurisdictions such as Argentina, Brazil, Canada, Italy, Mexico and Venezuela. With few exceptions, we and our subsidiaries are no longer subject to foreign income tax examinations for tax years before 2002. Several foreign audits are currently in progress and we do not expect any tax adjustments that would have a material impact on our financial position or results of operations.

We believe it is reasonably possible that a decrease of up to $2.0 million in unrecognized tax benefits may be necessary on or before December 31, 2012 due to the settlement of audits and the expiration of statutes of limitations. However, due to the uncertain and complex application of tax regulations, it is possible that the ultimate resolution of these matters may result in liabilities which could materially differ from these estimates. During 2011, unrecognized tax benefits decreased by $0.9 million as reflected in the above reconciliation.