UVA-C-2257

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UVA-C-2257 Alcatel S.A. and Lucent Technologies: The Effect of Acquisitions on Net Operating Losses

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UVA-C-2257

ALCATEL S.A. AND LUCENT TECHNOLOGIES: THE EFFECT OF ACQUISITIONS ON NET OPERATING LOSSES

On April 26, 2006, Mariam Porter, a telecom analyst for the investment bank Nasson McDonald & Co., was sitting at her desk working on her analysis of the recently announced merger of telecom equipment giants Lucent and Alcatel. The merger agreement, which was consummated after years of informal discussions, would create a communications technology equipment behemoth in most of its product areas. With approximately $25 billion in combined sales, the merger would create the number-one wireline, DSL, and optics equipment provider, while retaining the number-two spot in mobility and services, and third place in routing. In announcing the combination, the companies made audacious projections for cost synergies: $1.7 billion annually, a substantial majority of which would be achieved within two years, with a net present value of $12 billion. Geographically, the newly amalgamated company would be entrenched in the United States and Europe, with a strong presence in the fast-growing, emerging markets of Asia and Latin America.1 “There’s practically no customer, large or small, not being reached by either Alcatel or Lucent,” boasted Steve Tchuruk, chairman and CEO of Alcatel and planned chairman of the new firm.2 While the case made by the companies for the merger seemed compelling, Porter knew Alcatel and Lucent had been hit hard by the global collapse in communications technology spending in 2000 and 2001, and both had legacies of net operating losses (NOLs). On her desk sat an article from that day’s Wall Street Journal, which assessed the tax consequences of the merger. The article noted that Lucent held $3.5 billion in potential U.S. tax savings arising from NOLs plus $2.9 billion in other tax credits, which included foreign credits of $500 million.3 The article also predicted that the combined company could use more than $1.4 billion in NOLs per year to offset U.S. federal taxes over the next five years, $870 million of which was due to a

1

All data is from Lucent or Alcatel public SEC filings, including Lucent historical 10-Ks, Alcatel historical 20Fs, and merger-related press releases, unless otherwise noted. 2 From Alcatel-Lucent joint analyst presentation during a conference call on April 3, 2006. SEC proxy filing DEF14A dated 4/3/2006. 3 Jesse Drucker and Sara Silver, “Alcatel Stands to Reap Tax Benefit on Merger.” Wall Street Journal, 26 April 2006, C3.

This case was prepared by Jonathan Right under the supervision of Assistant Professor Mary Margaret Frank. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright © 2007 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to [email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. ◊

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relatively new IRS tax ruling.4 As Porter began to dive deeper into the effect of the transaction on the companies’ NOLs, she wondered whether the article’s assessment was correct and what impact the NOLs had on the structure and the value of the deal.

Alcatel S.A. With a market cap of $21.2 billion, Alcatel was one of the largest communications equipment suppliers in the world.5 Based in Paris, France, the company served fixed-line and wireless communications providers, ISPs, governments, and businesses in over 130 countries. The company was organized into three divisions: fixed communications, mobile communications, and private communications, and it served the telecommunications market across the spectrum of equipment needs. Products included everything from switches and routers along the backbone of communications networks to the development, manufacture, and management of undersea transmission networks to mobile communications hardware and software. Revenues grew 7.3% in 2005 to almost $16 billion; almost 50% of the company’s sales were in Europe, while 14% of revenues were found in North America (Exhibit 1). The collapse in technology spending that followed the rapid decline in the stock market in 2000 and 2001 had a dramatic effect on the profits of tech equipment providers, and Alcatel was no exception. After earning (euros) EUR449 million in 1999, the company’s net income dipped dramatically, falling to a EUR481 million loss in 2000 before losing EUR4.9 billion in 2001. The company did not break even again until 2004, when it earned a net income of EUR550 million. Exhibit 2 provides Alcatel’s 2005 and 2004 income statements, balance sheets, and excerpts from its income tax footnotes reported using U.S. GAAP. Exhibit 3 shows the deterioration and recovery of Alcatel’s total operating earnings under French GAAP, along with the portions that it earned in and out of the United States.6 In 2005, Alcatel yielded total operating earnings of EUR1189 million, EUR406 million of which came from the United States.

Lucent Technologies Lucent began its storied history as the telecommunications equipment arm of AT&T. In a 1982 antitrust settlement, the Department of Justice sought to loosen AT&T’s monopoly in both the long distance and local telephone markets. Therefore, AT&T separated into a long distance and equipment company, which retained the AT&T name, and seven regional local telephone

4 5

Internal Revenue Service Notice 2003-65, 2003-2 C.B. 747. Dennis Berman, et al., “Lucent, Alcatel Are Far Along in Merger Talks.” Wall Street Journal, 24 March 2006,

A1. 6

Until 2001, U.S. earnings were reported as from the United States. After 2001, earnings from the United States were grouped with earnings from all of North America.

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UVA-C-2257

service providers, called Regional Bell Operating Companies (RBOCs), which became known as the “Baby Bells.” Nonetheless, AT&T still held an almost exclusive grip on equipment sales to the RBOCs through Lucent. When the 1990s’ deregulation opened the doors for the Baby Bells to enter the long distance market, these emerging titans balked at purchasing their equipment from a direct competitor in long distance, instead looking to other providers such as Alcatel. To alleviate the concerns of its customers (i.e., the Baby Bells), AT&T spun off Lucent in 1996.7 The resulting company became a powerful provider of equipment, systems, software, and services to the telecommunications market, with a market cap of approximately $12.6 billion before the proposed transaction with Alcatel.8 With products that essentially paralleled Alcatel’s, the company primarily served large, established service providers in the wireless, wireline telecom, and optical networking spaces, as well as the U.S. government. Its R&D arm, Bell Laboratories, became one of the world’s largest research and development organizations focused on communications. In 2005, Lucent employed 30,500 workers, with over 18,500 in the United States. Sixty-six percent of the company’s FY2005 sales of $9.4 billion were located in the United States. (Exhibit 1) Lucent’s earnings history paralleled Alcatel’s during the 2000 telecom bust and 2001 recession. Net income fell from $4.8 billion for the fiscal year ending September 30, 1999, to a net loss of $16.2 billion in 2001; net income did not reach positive territory again until 2004. Exhibit 4 shows the rise, fall, and recovery of Lucent’s total, U.S., and non-U.S. pre-tax earnings under U.S. GAAP. Exhibit 5 reports estimates of Lucent’s federal taxable income from 1998 to 2005. Exhibit 6 provides Lucent’s 2005 and 2004 income statements, balance sheets, and excerpts from its income tax footnotes.

The Merger The transaction was structured as a reverse triangular A reorganization, approximately 40% owned by Lucent shareholders post-transaction. Based in Paris, Alcatel-Lucent would be helmed by Lucent’s CEO Patricia Russo. Alcatel’s CEO Steve Tchuruk would serve as the nonexecutive chairman. The fourteen board positions would be divided equally: six directors from Alcatel (including Tchuruk), six from Lucent (including Russo), and two outside appointees. The parties expected 34% of combined revenues of $25 billion to come from North America (Exhibit 1). While some analysts thought the companies were compatible, the deal failed to garner much

7

http://www.corp.att.com/history/milestones.html. Dennis Berman, et al., “Lucent, Alcatel Are Far Along in Merger Talks.” Wall Street Journal, 24 March 2006, A1. 8

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excitement due to Lucent’s perceived difficult market and inadequate product offerings.9 Most analysts did not mention the tax implications of the deal in their initial notes to clients. As Porter prepared to walk her clients through the tax effects of the transaction, she anticipated their questions. What would happen to the Lucent and Alcatel’s NOLs following the transaction? How would Alcatel’s ability to use Lucent’s NOLs affect the structure of the transaction and the purchase price? How much value, if any, would be unlocked through tax efficiencies attributable to the NOLs? Were these tax efficiencies drawn solely from Lucent, or would Alcatel’s tax position be improved as well? How much in federal taxes would the combined company pay over the foreseeable future? Porter remembered a guide on NOLs prepared by the firm for its training program, which she attended upon her arrival at the firm earlier in the year. Although she and her new colleagues had complained about suffering through the tax review at the time, she was now grateful she had some exposure to the issues as she pulled the materials off her shelf and began to work through the guide. (see UVA-C-2256)

Paul Silverstein, ALA Merger: Timing + Terms = > Implications, Credit Suisse Equity Research United States, 3 April 2006; see also Aaron C. Rakers, LU + ALA Finalized−$13.5B All-Stock Deal Expected to Close in 6–12 Months, A.G. Edwards, 3 April 2006; Brian Modoff, “Upgrade to Hold on Merger with Alcatel.” Deutsche Bank Research, 3 April 2006. 9

UVA-C-2257

-5Exhibit 1

ALCATEL S.A. AND LUCENT TECHNOLOGIES: THE EFFECT OF ACQUISITIONS ON NET OPERATING LOSSES 2005 Alcatel, Lucent, and Combined Corporation’s Geographic Sales Mix Lucent

Alcatel

Caribbean & Caribbean & Latin America 7% Middle East & Africa

Middle East & Africa North America 14%

Africa 1%

Latin America 6%

Pacific

14%

14%

Pacific

Europe

16%

13% Europe 49%

North America 66%

Combined Caribbean & Latin America 7%

Middle East & Africa 9%

North America 34% Pacific 15%

Europe 35%

UVA-C-2257

-6Exhibit 2

ALCATEL S.A. AND LUCENT TECHNOLOGIES: THE EFFECT OF ACQUISITIONS ON NET OPERATING LOSSES Alcatel’s Income Statements, Balance Sheets, Income Tax Footnotes in U.S. GAAP

Alcatel’s Consolidated Income Statements

(in millions of euros) 2005

Net sales Cost of sales Administrative and selling expenses Research and development expenses Purchased in-process R&D Restructuring costs Amortization and impairment of goodwill and other Incometi(loss) from operations

2004

13,129 (8,517) (2,049) (1,439) (10) (174) —

12,663 (8,092) (2,004) (1,573) (9) (431) (4)

Interest expense on notes mandatorily redeemable for shares Other interest expense Interest income and other financial income, net Other income (expense), net Gain on sale of stock in subsidiaries

940 (40) (203) 114 — 165

550 (44) (191) 128 — 221

Income (loss) from continuing operations before taxes Share in net income of equity affiliates Provision for income tax Minority interests

976 (22) (156) (35)

664 (33) (9) (66)

Net income (loss) from continuing operations

763

556

Income (loss) from discontinued operations Net income (loss)

— 763

(6) 550

UVA-C-2257

-7Exhibit 2 (continued)

Alcatel’s Consolidated Balance Sheets as of December 31

2005

2004

(in millions of euros):

ASSETS Cash and cash equivalents Marketable securities, net Other debtors Trade receivables and related accounts Inventories, net Assets held for sale TOTAL CURRENT ASSETS Other investments & other non-current assets, net Share in net assets of equity affiliates Investments and other non-current assets Property, plant, and equipment, at cost Less: accumulated depreciation Property, plant, and equipment, net Acquisition goodwill, net Other intangible assets, net Intangible assets, net TOTAL NON CURRENT ASSETS TOTAL ASSETS LIABILITIES AND SHAREHOLDERS’ EQUITY Other current liabilities Trade payables and related accounts Accrued contract costs & other accrued liabilities Customers deposits and advances Short-term financial debt Liabilities related to discontinued activities or to a disposal group held for sale TOTAL CURRENT LIABILITIES Other long-term liabilities Other long-term financial debt Bonds and notes issued, long-term Long-term financial debt Other reserves Accrued pensions and retirement obligations Total reserves TOTAL NON-CURRENT LIABILITIES Notes mandatorily redeemable for shares MINORITY INTERESTS Capital stock Additional paid-in capital Retained earnings, fair value, and other reserves Unrealized holding gains (losses) and cash flow hedge Cumulative translation adjustments Less treasury stock, at cost SHAREHOLDERS’ EQUITY TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

4,510 640 1,310 4,090 1,695 50 12,295 2,312 706 3,018 4,636 (3,468) 1,168 7,024 679 7,703 11,889 24,184

4,611 552 1,894 3,494 1,502 118 12,171 2,396 708 3,104 4,910 (3,692) 1,218 6,829 566 7,395 11,717 23,888

2,106 3,755 1,264 1,144 1,051 — 9,320 573 394 2,519 2,913 470 1,717 2,187 5,673 — 472 2,857 21,594 (13,558) 36 (554) (1,656)

2,553 3,356 1,573 1,164 1,053 100 9,799 381 388 3,240 3,628 639 1,557 2,196 6,205 645 375 2,610 21,215 (14,241) 82 (1,116) (1,686)

8,719 24,184

6,864 23,888

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UVA-C-2257

Exhibit 2 (continued)

Excerpts from Alcatel’s Income Tax Footnotes (in millions of euros): Deferred Income Tax Assets and Liabilities Tax effect of temporary differences related to: Accounting for long-term contracts Depreciation of property, plant, and equipment Other Deferred tax liabilities Tax losses carried forward Accrued pension and retirement obligation Other reserves Other Deferred tax assets Less: valuation allowance Deferred tax assets, net Total deferred tax assets (liabilities), net

2005

2004

(42) (45) (75) (162) 5,836 442 351 716 7,345 (5,577) 1,768 1,606

(16) — (93) (109) 4,858 111 217 1,115 6,301 (4,636) 1,665 1,556

Effective income tax rate Income (loss) before taxes, share in net income of equity affiliates, purchased research and development, impairment of goodwill, minority interests and extraordinary items Average income tax rate Expected tax (charge) benefit Impact of: —net change in valuation allowance —tax credits —other Actual income tax (charge) benefit Effective tax rate

2005

2004

985 32.3% (318)

678 28.4% (193)

119 5 38 (156) 15.8%

(10) 14 180 (9) 1.4%

UVA-C-2257

-9Exhibit 3 ALCATEL S.A. AND LUCENT TECHNOLOGIES: THE EFFECT OF ACQUISITIONS ON NET OPERATING LOSSES

Alcatel’s Operating Earnings History under French GAAP, 1998 to 2005 (€ in millions)

To tal

U .S .

N o n -U .S .

2 ,0 8 2

1 ,6 6 2

1 ,1 8 9

1 ,1 7 9

1 ,1 3 7 1 ,0 4 4 892

850

813

783

449

420 231

359 266

245

406 329

90

1998

1999

2000

2001

(3 2 8 )

2002

(3 4 5 )

(5 9 4 ) (7 2 7 )

2003

(3 8 2 )

2004

2005

UVA-C-2257


Lucent’s Pre-Tax Earnings 1998 to 2005 ($ in millions) T o ta l

U .S.

N o n -U .S.

4 ,1 6 9 3 ,0 2 6

2 ,3 0 6 1 ,6 8 9

1999

1 ,0 6 3

2000

1 ,0 3 4

985

654

609

231 1998

2 ,3 4 9 1 ,6 8 1

2001

(8 1 5 )

2002

(7 ,0 6 9 ) (7 ,0 7 6 )

(1 9 ,0 8 9) (1 9 ,9 0 4)

Note: Pre-tax earnings in Exhibit 4 do not compare to operating earnings in Exhibit 3.

78

45

7 2003 (1 ,0 0 3 ) (1 ,0 4 8 )

2004

742 2005

292


Lucent’s Estimated Federal Taxable Income ($ in millions)

Note: Federal taxable income estimated as current federal tax expense/35%.

UVA-C-2257

UVA-C-2257

-12Exhibit 6

ALCATEL S.A. AND LUCENT TECHNOLOGIES: THE EFFECT OF ACQUISITIONS ON NET OPERATING LOSSES

Lucent’s Income Statements, Balance Sheets, and Income Tax Footnotes LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS ($ in millions) Year Ended September 30, 2005 2004 Revenues: Products Services Total revenues Costs: Products Services Total costs Gross margin Operating expenses: Selling, general and administrative Research and development In-process research and development Goodwill impairment Business restructuring Total operating expenses Operating income (loss) Other income (expense), net Interest expense Income (loss) before income taxes Income tax benefit Net income (loss) Conversion and redemption cost–8% preferred stock Preferred stock dividends and accretion Net income (loss) applicable to common shareowners

$ 7,312 2,129 9,441

$ 7,113 1,932 9,045

3,760 1,557 5,317 4,124

3,824 1,442 5,266 3,779

1,696 1,177 — — (10) 2,863 1,261 114 341 1,034 (151) 1,185 — — $ 1,185

1,296 1,270 14 — (20) 2,560 1,219 240 396 1,063 (939) 2,002 (1) 12 $ 2,013

UVA-C-2257

-13Exhibit 6 (continued) LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ($ in millions) September 30, 2005 ASSETS Cash and cash equivalents Marketable securities Receivables, net Inventories Other current assets Total current assets Marketable securities Property, plant, and equipment, net Prepaid pension costs Goodwill and other acquired intangibles, net Other assets Total assets LIABILITIES Accounts payable Payroll and benefit-related liabilities Debt maturing within one year Other current liabilities Total current liabilities Post-retirement and post-employment benefit liabilities Pension liabilities Long-term debt Other liabilities Total liabilities Commitments and contingencies SHAREOWNERS’ EQUITY (DEFICIT) Preferred stock—par value $1.00 per share; authorized shares: 250; issued and outstanding: none Common stock—par value $0.01 per share; Authorized shares: 10,000; 4,457 issued and 4,447 outstanding shares as of September 30, 2005, and 4,396 issued and 4,395 outstanding shares as of September 30, 2004 Additional paid-in capital Accumulated deficit Accumulated other comprehensive loss Total shareowners’ equity (deficit) Total liabilities and shareowners’ equity (deficit)

$ 2,410 357 1,395 731 690 5,583 2,163 1,295 6,010 419 930 $ 16,400

$

769 1,095 368 1,588 3,820 4,751 1,423 5,066 965 16,025 —

—

45 23,513 (19,608) (3,575) 375 $ 16,400

September 30, 2004 $ 3,379 858 1,359 822 1,813 8,231 636 1,376 5,358 434 928 $ 16,963

$

872 1,232 1 2,361 4,466 4,881 1,874 5,989 1,132 18,342 —

—

44 23,005 (20,793) (3,635) (1,379) $ 16,963

UVA-C-2257

-14Exhibit 6 (continued) LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES EXCERPTS FROM THE INCOME TAX FOOTNOTES

The following table summarizes the U.S. and non-U.S. components of income (loss) before income taxes and the pr ovision (benefit) for income taxes. Years en ded September 30 , 2005 2 004 (in millions) Income (loss) before income taxes: U.S. Non-U.S. Income (loss) before income taxes Benefit for income tax es: Current: Federal State an d lo cal Non-U.S. Subtotal Deferred : Non-U.S. Subtotal Benefit for income tax es

$ 742 292 $ 1,034

$ 985 78 $ 1,063

$ (117) (21) 71 (67)

$ (967) (10) 57 (920)

(84) (84) $ (151)

(19) (19) $ (939)

The following table summarizes the principal elements of the difference between the effective tax (benefit) rate and the U.S. federal statutory income tax (benefit) rate. Years end ed September 30, 20 05 2004 (in millions) Provision (benefit) for inco me taxes at 3 5% statutory rate State an d lo cal income tax (benefit), net of federal income tax effect Foreign earn ings taxed at differen t rates Tax audit-related adjustments Medicare Part D subsidy Other differences, n et Chan ge in valuation allowance Benefit for income tax es Effective income tax (benefit) rate

$ 3 62 21 (16) (1 30) (24) (7) (3 57) $ (1 51) (1 4.6)%

$ 372 33 (24) (142) (6) 16 (1,188) $ (939) (88.4%

The following table summarizes the components of deferred income tax assets and liabilities. (in millions)

Years ended September 30 2005 2004

Bad deb t and customer financing reserves Inventory reserves Business restructuring reserves Pension and post-retiremen t benefits Other employee benefits Other reserves Net operatin g loss/cred it carryforwards Valuation allowance Deferred tax assets Pension ben efits Other, in cluding depreciation and amortization Deferred tax liabilities

$ 60 19 2 58 2,49 8 30 0 38 4 6,36 8 (7,29 8) $ 2,5 62 $ 2,3 57 10 1 $ 2,4 58

$ 98 216 86 2,653 440 702 6,140 (8,027) $ 2,308 $ 2,102 187 $ 2,289

Net deferred tax assets

$ 1 04

$ 19

UVA-C-2257

-15Exhibit 6 (continued) The following table summar ize s carryfor war ds of losses (tax-e ffected) and ta x credits. (in millions)

Amou nt

Federal net o perating losses State net op eratin g los ses Capital lo sses Foreign net o perating losses/credits Foreign tax credits Research credits State credits (variou s) Total as of September 30, 2005

$ 3 ,537 879 214 528 219 778 213 $ 6 ,368

Ex piratio n

2022 to 2 025 2006 to 2 025 2007 to 2 009 2 006 to in definite 2 010 2017 to 2 022 2007 to 2 018

The wr ite-off of ca rryfor war ds inc lude s the impact of the expiration of cer tain ne t operating loss and ta x credit car ryforwards, the re patriation of non-U.S. earnings to the U.S. and audit-related and other adjustme nts that reduced the net operating loss carryforwa rds during the respec tive periods. The realiz ation of defe rred tax assets depe nds upon the existence of sufficient taxable income within the ca rry-bac k or carryfor ward periods under the tax law for e ach ta x jurisdic tion. We have conside red the following possible sources of taxable income when asse ssing the realiz ation of the deferr ed ta x a ssets: • • • •

F utur e taxa ble income exclusive of reversing te mporar y differe nces and car ry-forwards F utur e reversals of existing taxable te mporar y differences Taxable income in prior carry-back years Tax planning stra tegies

We have not r elied upon future taxable income exc lusive of temporary diff erences and carryforwards for the re alization of U.S. defe rred tax assets during recent pe riods. Relia nce on this source is difficult whe n there is nega tive evidence such as cumulative losses in recent ye ars, even if inc ome is r eported in the current period. Although profits were generated in recent pe riods, a substa ntial a mount of the profits were ge ner ated from a pension credit that is not curr ently taxable and from non-U.S. sources. As a r esult, we conc luded that ther e was not sufficient positive evidence to enable us to conclude that it was m ore likely than not tha t the net U.S. deferre d tax assets would be rea lized. Therefore, we have maintained a valuation allowance on our net U.S. defe rred tax assets as of September 30, 2005 a nd 2004. We have assume d that all of our defe rred tax liabilities will generate taxable income or reduc e potential tax deductions. Most of these deferr ed tax liabilitie s are r elated to pr epaid pension c osts tha t result primar ily from pension credits that are not cur rently taxable . Dur ing the fourth quarter of fiscal 2003, we filed a net operating loss carry-back claim related to the car ry bac k of our f iscal yea r 2001 federa l net operating loss to 1996, a year in which we file d our fe der al income tax return as part of the AT&T consolidated group. We reac hed a te ntative agreem ent with the Inter nal R eve nue Se rvice (IRS) on S eptember 1, 2004 that allowed f or a tax refund of $816 million (plus statutory interest to the date of payment), subject to approva l by the Congressiona l Joint Committee on Taxation. The tax bene fit related to the claim was not r ecogniz ed at that tim e or prior to that time, because it wa s r elated to a c omplex matter and there wa s no assura nce that approval from the Joint Committee would be obta ined. On November 8, 2004, we rec eived written conf irma tion f rom the IRS that the Joint Committee approved our te ntative agreem ent with the IR S and that our agreeme nt with the IRS wa s final. We wer e require d to rea ssess the re alization of our ne t operating loss c arryfor wards as of S eptember 30, 2004, because the Joint Committee ’s final approval was received pr ior to the issuance of our c onsolidated financial statements. As a result, we recognized an $816 million income tax benefit from the r eve rsal of valuation allowa nces due to the realiza tion of defer red tax assets and inte rest income of $45 million during the fourth quarter of fiscal 2004. This refund plus additional inte rest was re ceived during fisca l 2005. We have not provided for U.S . deferr ed income taxes or foreign withholding taxes on undistributed e arnings of $536 million of our non-U.S. subsidiaries, since these ea rnings ar e intende d to be r einve sted indefinite ly. As a result of our U.S. net operating loss c arryfor wards and valuation allowance, the am ount of additional taxes that might be payable on such undistributed e arnings is not e xpected to be signific ant. However, if signific ant c hanges to our net oper ating loss c arryfor wards and va luation allowa nce oc cur in the future, the amount of additional taxe s on undistributed earnings could be significant. As a result, it is not pr actical to estimate the amount of additional ta xes that might be paya ble on suc h undistr ibuted ea rnings. We a re subject to ongoing tax examina tions and assessments in va rious jurisdictions. Acc ordingly, we ma y r ecord increme ntal tax expense based upon the probable outc ome s of such ma tters. In addition, we adjust the previously reported tax expense to reflect the e xpected results of these e xam inations. The net income tax bene fit rec ognized a s a result of the expe cted favorable resolution of certain ta x a udit matters were $130 million, $142 million and $77 million dur ing fiscal 2005, 2004, and 2003, respectively.