Lexmark 2007 Annual Report Download - page 82

Earnings before income taxes were as follows:
2007 2006 2005
U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $135.7 $219.4 $339.0
Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213.8 239.9 214.7
Earnings before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $349.5 $459.3 $553.7
The Company realized an income tax benefit from the exercise of certain stock options in 2007, 2006 and
2005 of $3.4 million, $11.8 million and $15.8 million, respectively. This benefit resulted in a decrease in
current income taxes payable and an increase in capital in excess of par.
A reconciliation of the provision for income taxes using the U.S. statutory rate and the Company’s effective
tax rate was as follows:
Amount % Amount % Amount %
2007 2006 2005
Provision for income taxes at
statutory rate . . . . . . . . . . . . . . . $122.3 35.0% $160.8 35.0% $193.8 35.0%
State and local income taxes, net
of federal tax benefit. . . . . . . . . . 6.8 2.0 7.5 1.6 12.4 2.2
Foreign tax differential . . . . . . . . . . (42.2) (12.1) (23.9) (5.2) (41.2) (7.4)
Research and development
credit . . . . . . . . . . . . . . . . . . . . . (5.6) (1.6) (6.8) (1.5) (14.0) (2.5)
Repatriation under AJCA . . . . . . . . — ———51.9 9.4
Tax-exempt interest, net of related
expenses . . . . . . . . . . . . . . . . . . (1.4) (0.4) (3.6) (0.8) (4.7) (0.9)
Valuation allowance . . . . . . . . . . . . 0.2 0.1 7.9 1.7 2.4 0.4
Reversal of previously accrued
taxes . . . . . . . . . . . . . . . . . . . . . (18.4) (5.3) (14.3) (3.1) ——
Adjustments to previously recorded
taxes . . . . . . . . . . . . . . . . . . . . . (11.2) (3.2) —— ——
Other . . . . . . . . . . . . . . . . . . . . . . . (1.8) (0.6) (6.7) (1.4) (3.2) (0.6)
Provision for income taxes . . . . . . . $ 48.7 13.9% $120.9 26.3% $197.4 35.6%
The effective income tax rate was 13.9% for the year ended December 31, 2007. The 12.4 percentage
point reduction YTY of the effective tax rate was primarily due to a geographic shift of earnings
(6.9 percentage points) as well as reversals and adjustments of previously accrued taxes
(5.4 percentage points). During 2007, the Company reversed $18.4 million of previously accrued taxes
mostly due to the settlement of a tax audit outside the U.S. and recorded $11.2 million of adjustments to
previously recorded tax amounts. Specific to the fourth quarter of 2007, the Company recorded
adjustments of $6.4 million to previously recorded tax amounts. The impact of these adjustments was
insignificant to prior periods.
The effective income tax rate was 26.3% for the year ended December 31, 2006. During 2006, the IRS
completed its examination of the Company’s income tax returns for the years 2002 and 2003. Upon completion
of that audit, the Company reversed $2.5 million of previously accrued taxes. Additionally, the Company also
reversed $11.8 million of previously accrued taxes based on the expiration of various domestic and foreign
statutes of limitation. The benefit of those two reversals was included in the 2006 tax rate.
During 2006, the Company was subject to a tax holiday in Switzerland with respect to the earnings of one of
the Company’s wholly-owned Swiss subsidiaries. The holiday expired at the end of 2006. The benefit
derived from the tax holiday was $1.6 million in 2006 and $11.5 million in 2005.
The 2005 effective income tax rate was impacted by two specific events. First, due to the retroactive
extension of a favorable, non-U.S. tax rate, the income tax provision was reduced by $3.1 million. Second,
on October 22, 2004, the President of the U.S. signed the American Jobs Creation Act of 2004 (the
“AJCA”). The AJCA created a temporary incentive for U.S. corporations to repatriate accumulated income
earned abroad by providing an 85 percent dividends-received deduction for certain dividends from
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