Income Taxes

12 Months Ended

Jul. 31, 2011

Income Taxes

Income Taxes

NOTE J Income Taxes

          The components of earnings before income taxes are as follows:

	2011		2010		2009
	(thousands of dollars)
Earnings before income taxes:
United States	$	117,562	$	85,987	$	69,863
Foreign		194,701		144,189		91,562
Total	$	312,263	$	230,176	$	161,425

          The components of the provision for income taxes are as follows:

	2011			2010			2009
	(thousands of dollars)
Income taxes:
Current
Federal	$	26,675		$	25,455		$	18,624
State		3,555			2,206			2,444
Foreign		54,785			33,327			13,176
		85,015			60,988			34,244
Deferred
Federal		8,556			3,860			(3,888	)
State		191			20			90
Foreign		(6,790	)		(855	)		(928	)
		1,957			3,025			(4,726	)
Total	$	86,972		$	64,013		$	29,518

          The following table reconciles the U.S. statutory income tax rate with the effective income tax rate:

	2011			2010			2009
Statutory U.S. federal rate		35.0	%		35.0	%		35.0	%
State income taxes		1.0			0.8			1.3
Foreign taxes at lower rates		(6.6	)		(8.2	)		(7.5	)
Export, manufacturing and research credits		(1.6	)		(0.9	)		(0.5	)
U.S. tax impact on repatriation of earnings		(0.3	)		0.1			0.7
Change in unrecognized tax benefits		0.1			1.2			(10.6	)
Other		0.3			(0.2	)		(0.1	)
		27.9	%		27.8	%		18.3	%

          The tax effects of temporary differences that give rise to deferred tax assets and liabilities are as follows:

	2011			2010
	(thousands of dollars)
Deferred tax assets:
Accrued expenses	$	12,243		$	9,130
Compensation and retirement plans		33,298			39,438
Tax credit and NOL carryforwards		1,173			954
Inventory reserves		9,545			8,324
Other		3,311			1,846
Deferred tax assets:		59,570			59,692
Valuation allowance		(692	)		(604	)
Net deferred tax assets		58,878			59,088
Deferred tax liabilities:
Depreciation and amortization		(37,112	)		(30,248	)
Other		(1,119	)		(1,420	)
Deferred tax liabilities		(38,231	)		(31,668	)
Net deferred tax asset	$	20,647		$	27,420

          The effective tax rate for Fiscal 2011 was 27.9 percent compared to 27.8 percent in Fiscal 2010. The average underlying tax rate remained at 29.7 percent, while discrete items were also a consistent percentage of pre-tax profits. Fiscal 2010 contained $4.3 million of discrete tax benefits from the expiration of the statute of limitations at foreign subsidiaries and other discrete items. Fiscal 2011 contained $5.8 million of discrete tax benefits primarily from the release of reserves after the favorable conclusions of foreign tax audits, the expiration of statutes in various jurisdictions, and the favorable impact of dividends from some foreign subsidiaries.

          The Company has not provided for U.S. income taxes on additional undistributed earnings of non-U.S. subsidiaries of approximately $623.0 million. The Company currently intends to permanently reinvest these undistributed earnings overseas as there are significant investment opportunities there, and the Company does not intend to incur a tax cost to repatriate these funds. If any portion were to be distributed, the related U.S. tax liability may be reduced by foreign income taxes paid on those earnings plus any available foreign tax credit carryovers. Determination of the unrecognized deferred tax liability related to these undistributed earnings is not practicable.

          The Company has cumulative pre-tax loss carryforwards of $4.8 million, which exist in various international subsidiaries. If fully realized, the unexpired net operating losses may be carried forward to offset future local income tax payments of $1.2 million, at current rates of tax. Approximately 12 percent of these net operating losses expire within the next three years, while the majority of the remaining net operating loss carryforwards expire more than 5 years out or have no statutory expiration under current local laws. However, as it is more-likely-than-not that certain of these losses will not be realized, a valuation allowance of $0.7 million exists as of July 31, 2011.

          The Company maintains a reserve for uncertain tax benefits. The accounting standard defines the threshold for recognizing the benefits of tax return positions in the financial statements as "more-likely-than-not" to be sustained by the taxing authorities based solely on the technical merits of the position. If the recognition threshold is met, the tax benefit is measured and recognized as the largest amount of tax benefit that in the Company's judgment is greater than 50 percent likely to be realized. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:

	2011			2010			2009
	(thousands of dollars)
Gross unrecognized tax benefits at beginning of fiscal year	$	18,994		$	16,928		$	32,002
Additions for tax positions of the current year		7,406			3,122			3,527
Additions for tax positions of prior years		668			470			772
Reductions for tax positions of prior years		(164	)		(179	)		(8,258	)
Settlements		(3,895	)		—			(10,092	)
Reductions due to lapse of applicable statute of limitations		(3,004	)		(1,347	)		(1,023	)
Gross unrecognized tax benefits at end of fiscal year	$	20,005		$	18,994		$	16,928

          The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the fiscal year ended July 31, 2011, the Company recognized interest expense, net of tax benefit, of approximately $0.3 million. At July 31, 2011 and July 31, 2010, accrued interest and penalties on a gross basis were $1.5 million and $2.5 million, respectively.

          The Company's uncertain tax positions are affected by the tax years that are under audit or remain subject to examination by the relevant taxing authorities. The following tax years, in addition to the current year, remain subject to examination, at least for certain issues, by the major tax jurisdictions indicated:

Major Jurisdictions	Open Tax Years
Belgium	2010
China	2001 through 2010
France	2008 through 2010
Germany	2009 through 2010
Italy	2003 through 2010
Japan	2009 through 2010
Mexico	2006 through 2010
Thailand	2005 through 2010
United Kingdom	2010
United States	2008 through 2010

          If the Company were to prevail on all unrecognized tax benefits recorded, substantially all of the unrecognized tax benefits would benefit the effective tax rate. With an average statute of limitations of about 5 years, up to $3.0 million of the unrecognized tax benefits could potentially expire in the next 12 month period, unless extended by audit. It is possible that quicker than expected settlement of either current or future audits and disputes would cause additional reversals of previously recorded reserves in the next 12 month period. Currently, the Company has approximately $0.2 million of unrecognized tax benefits that are in dispute with various taxing authorities related to transfer pricing and deductibility of expenses. Quantification of an estimated range and timing of future audit settlements cannot be made at this time.