Income Taxes

Income tax expense was calculated based upon the following components of income (loss) from continuing operations before income tax:



	2012			2011			2010
Pretax income (loss):
United States	$	(66,102	)	$	(119,984	)	$	(230,262	)
Outside the United States	175,059			137,108			106,079
Total pretax income (loss)	$	108,957		$	17,124		$	(124,183	)

The components of income tax expense are as follows:



	2012			2011		2010
Current:
Foreign	$	38,113		$	32,649	$	44,481
State	(361		)	2,332		2,907
Total current	37,752			34,981		47,388
Deferred:
Federal	20,884			20,247		22,119
Foreign	5,190			28,054		(6,514		)
State	(3,441		)	9,013		196
Total deferred	22,633			57,314		15,801
Income tax expense	$	60,385		$	92,295	$	63,189

The following reconciles the total income tax expense, based on the Federal statutory income tax rate of 35%, with the Company’s recognized income tax expense:



	2012			2011			2010
Statutory federal income tax expense (benefit)	$	38,135		$	5,994		$	(43,464	)
Permanent items	8,595			10,607			4,828
Exempt foreign income	(5,760		)	(380		)	(9		)
Foreign statutory rate vs. U.S. statutory rate	(15,211		)	(14,132		)	(9,601		)
State income taxes, net of federal benefit	(2,164		)	1,242			(4,979		)
Residual tax on foreign earnings	29,844			18,943			6,609
FURminator purchase accounting benefit	(14,511		)	—			—
Valuation allowance	26,003			68,615			90,977
Reorganization items	—			—			7,553
Unrecognized tax (benefit) expense	(4,386		)	(2,793		)	3,234
Inflationary adjustments	(803		)	(1,472		)	3,409
Correction of immaterial prior period error	—			4,873			5,900
Other, net	643			798			(1,268		)
Income tax expense	$	60,385		$	92,295		$	63,189

The tax effects of temporary differences, which give rise to significant portions of the deferred tax assets and deferred tax liabilities, are as follows:



	September 30,
	2012			2011
Current deferred tax assets:
Employee benefits	$	16,399		$	14,188
Restructuring	8,054			10,682
Inventories and receivables	22,495			21,521
Marketing and promotional accruals	8,270			8,911
Other	14,440			14,742
Valuation allowance	(29,808		)	(28,772		)
Total current deferred tax assets	39,850			41,272
Current deferred tax liabilities:
Inventories and receivables	(2,618		)	(5,015		)
Unrealized gains	(1,153		)	(2,382		)
Other	(7,936		)	(5,705		)
Total current deferred tax liabilities	(11,707		)	(13,102		)
Net current deferred tax assets	$	28,143		$	28,170
Noncurrent deferred tax assets:
Employee benefits	$	34,927		$	30,177
Restructuring and purchase accounting	371			2,269
Net operating loss and credit carry forwards	572,857			525,394
Prepaid royalty	7,006			7,346
Property, plant and equipment	3,255			5,240
Unrealized losses	2,521			9,000
Long-term debt	3,976			22,602
Intangibles	4,282			4,749
Other	7,866			5,743
Valuation allowance	(354,992		)	(345,121		)
Total noncurrent deferred tax assets	282,069			267,399
Noncurrent deferred tax liabilities:
Property, plant, and equipment	(15,337		)	(16,593		)
Unrealized gains	(15,803		)	(11,619		)
Intangibles	(596,199		)	(571,454		)
Taxes on unremitted foreign earnings	(29,231		)	—
Other	(2,964		)	(5,069		)
Total noncurrent deferred tax liabilities	(659,534		)	(604,735		)
Net noncurrent deferred tax liabilities	$	(377,465	)	$	(337,336	)
Net current and noncurrent deferred tax liabilities	$	(349,322	)	$	(309,166	)

Effective October 1, 2012, the Company began recording residual U.S. and foreign taxes on current foreign earnings as a result of its change in position regarding future repatriation and the requirements of ASC 740. To the extent necessary, the Company intends to utilize earnings of foreign subsidiaries generated after September 30, 2011, to support management's plans to voluntarily accelerate pay down of U.S. debt, fund distributions to shareholders, fund U.S. acquisitions, and satisfy ongoing U.S. operational cash flow requirements. As a result, earnings of the Company's non-U.S. subsidiaries after September 30, 2011 are not considered to be permanently reinvested, except in jurisdiction where repatriation is either precluded or restricted by law. Accordingly, the Company is providing residual U.S. and foreign deferred taxes to these earnings to the extent they cannot be repatriated in a tax-free manner. Accordingly during Fiscal 2012, the Company has provided residual taxes on approximately $97,638 of foreign earnings resulting in an increase in tax expense, net of a corresponding adjustment to the Company's domestic valuation allowance, of approximately $3,278, including $2,465 of expected tax on $76,475 of earnings not yet taxed in the U.S. During Fiscal 2011, the Company recorded residual U.S. and foreign taxes on approximately $39,391 of distributions of foreign earnings resulting in an increase in tax expense, net of a corresponding adjustment to the Company's domestic valuation allowance, of approximately $771. The Fiscal 2011 distributions were primarily non-cash deemed distributions under U.S. tax law. During Fiscal 2010, the Company recorded residual U.S. and foreign taxes on approximately $26,600 of actual and deemed distributions of foreign earnings resulting in an increase in tax expense, net of a corresponding adjustment to the Company's domestic valuation allowance, of approximately $0. The Fiscal 2010 distributions were primarily non-cash deemed distributions under U.S. tax law.

Remaining undistributed earnings of the Company’s foreign operations are approximately $415,713 at September 30, 2012, and are intended to remain permanently invested. Accordingly, no residual income taxes have been provided on those earnings at September 30, 2012. If at some future date these earnings cease to be permanently invested, the Company may be subject to U.S. income taxes and foreign withholding and other taxes on such amounts, which cannot be reasonably estimated at this time.

The Company, as of September 30, 2012, has U.S. federal and state net operating loss carryforwards of approximately $1,304,763 and $1,340,761, respectively. These net operating loss carryforwards expire through years ending in 2032. The Company has foreign loss carryforwards of approximately $119,100 which will expire beginning in 2016. Certain of the foreign net operating losses have indefinite carryforward periods. The Company is subject to an annual limitation on the use of its net operating losses that arose prior to its emergence from bankruptcy. The Company has had multiple changes of ownership, as defined under Section 382 of the Internal Revenue Code of 1986, as amended, that subject the Company’s U.S. federal and state net operating losses and other tax attributes to certain limitations. The annual limitation is based on a number of factors including the value of the Company’s stock (as defined for tax purposes), on the date of the ownership change, its net unrealized built in gain position on that date, the occurrence of realized built in gains in years subsequent to the ownership change, and the effects of subsequent ownership changes (as defined for tax purposes) if any. Due to these limitations, the Company estimates that $301,202 of the total U.S. federal and $385,159 of the state net operating loss would expire unused even if the Company generates sufficient income to otherwise use all its NOLs. In addition, separate return year limitations apply to limit the Company’s utilization of the acquired Russell Hobbs U.S. federal and state net operating losses to future income of the Russell Hobbs subgroup. The Company also projects that $110,794 of the total foreign loss carryforwards will expire unused. The Company has provided a full valuation allowance against these deferred tax assets.

A valuation allowance is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets depends on the ability of the Company to generate sufficient taxable income of the appropriate character in the future and in the appropriate taxing jurisdictions. As of September 30, 2012 and September 30, 2011, the Company’s valuation allowance, established for the tax benefit that may not be realized, totaled approximately $384,800 and $373,893, respectively. As of September 30, 2012 and September 30, 2011, approximately $349,316 and $338,538, respectively, related to U.S. net deferred tax assets, and approximately $35,484 and $35,354, respectively, related to foreign net deferred tax assets. The increase in the valuation allowance for deferred tax assets during Fiscal 2012 totaled approximately $10,907, of which approximately $10,778 related to an increase in the valuation allowance against U.S. net deferred tax assets, and approximately $130 related to an increase in the valuation allowance against foreign net deferred tax assets. As a result of the purchase of FURminator, the Company was able to release $14,511 of U.S. valuation allowance during Fiscal 2012. The release was attributable to $14,511 of net deferred tax liabilities recorded on the FURminator acquisition date balance sheet that offset other U.S. net deferred tax assets. During Fiscal 2011, the Company determined that a valuation allowance was required against deferred tax assets related to net operating losses in Brazil, and thus recorded a $25,877 charge to increase the valuation allowance.

The total amount of unrecognized tax benefits on the Company’s Consolidated Statements of Financial Position at September 30, 2012 and September 30, 2011 are $5,877 and $9,013, respectively. If recognized in the future, the entire amount of unrecognized tax benefits will affect the effective tax rate. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of September 30, 2012 and September 30, 2011 the Company had approximately $3,564 and $4,682, respectively, of accrued interest and penalties related to uncertain tax positions. The impact related to interest and penalties on the Consolidated Statement of Operations for Fiscal 2012 was a net decrease to income tax expense of $(1,184). The impact related to interest and penalties on the Consolidated Statement of Operations for Fiscal 2011 was a net decrease to income tax expense of $(1,422). The impact related to interest and penalties on the Consolidated Statement of Operations for Fiscal 2010 was a net increase to income tax expense of $1,527. In connection with the Merger, the Company recorded additional unrecognized tax benefits of approximately $3,299 as part of purchase accounting.

As of September 30, 2012, certain of the Company’s legal entities are undergoing income tax audits. The Company cannot predict the ultimate outcome of the examinations; however, it is reasonably possible that during the next 12 months some portion of previously unrecognized tax benefits could be recognized.

The following table summarizes the changes to the amount of unrecognized tax benefits of Company for Fiscal 2012, Fiscal 2011, and Fiscal 2010:




Unrecognized tax benefits at September 30, 2009	$	7,765
Russell Hobbs acquired unrecognized tax benefits	3,251
Gross decrease – tax positions in prior period	(904		)
Gross increase – tax positions in current period	3,390
Lapse of statutes of limitations	(694		)

Unrecognized tax benefits at September 30, 2010	$	12,808
Gross increase – tax positions in prior period	1,658
Gross decrease – tax positions in prior period	(823		)
Gross increase – tax positions in current period	596
Settlements	(1,850		)
Lapse of statutes of limitations	(3,376		)

Unrecognized tax benefits at September 30, 2011	$	9,013
Gross increase – tax positions in prior period	773
Gross decrease – tax positions in prior period	(1,308		)
Gross increase – tax positions in current period	776
Settlements	(1,737		)
Lapse of statutes of limitations	(1,640		)

Unrecognized tax benefits at September 30, 2012	$	5,877

The Company files income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions and is subject to ongoing examination by the various taxing authorities. The Company’s major taxing jurisdictions are the U.S., United Kingdom, and Germany. In the U.S., federal tax filings for years prior to and including the Company’s fiscal year ended September 30, 2008 are closed. However, the federal net operating loss carryforwards from the Company’s fiscal years ended September 30, 2008 and prior are subject to Internal Revenue Service (“IRS”) examination until the year that such net operating loss carryforwards are utilized and those years are closed for audit. The Company’s fiscal years ended September 30, 2009, 2010, 2011 and 2012 remain open to examination by the IRS. Filings in various U.S. state and local jurisdictions are also subject to audit and to date no significant audit matters have arisen.

In the U.S., federal tax filings for years prior to and including Russell Hobbs year ended June 30, 2008 are closed. However, the federal net operating loss carryforwards for Russell Hobbs fiscal years ended June 30, 2008 and prior are subject to examination by the IRS until the year that such net operating losses are utilized and those years are closed for audit.

During Fiscal 2011 we recorded the correction of an immaterial prior period error in our consolidated financial statements related to the effective state income tax rates for certain U.S. subsidiaries. During Fiscal 2010 we recorded the correction of an immaterial prior period error in our consolidated financial statements related to deferred taxes in certain foreign jurisdictions. We believe the correction of these errors to be both quantitatively and qualitatively immaterial to our annual results for Fiscal 2011, Fiscal 2010 or to the financial statements of any previous period. The impact of the corrections was an increase to income tax expense and an increase to deferred tax liabilities in Fiscal 2011 of approximately $4,873 and an increase to income tax expense and a decrease to deferred tax assets in Fiscal 2010 of approximately $5,900.