Note 9: Income Taxes

Income from continuing operations before income taxes and income from equity method investments			2013		2012		2011
United States		$	81,788	$	69,287	$	48,782
Non-U.S.			45,756		20,261		53,638
Total		$	127,544	$	89,548	$	102,420

Components of the provision for income tax expense (benefit)			2013		2012		2011
Current:
	U.S. federal	$	16,999	$	25,637	$	6,286
	State		1,372		2,663		1,191
	Non-U.S.		11,930		18,999		17,994
			30,301		47,299		25,471
Deferred:
	U.S. federal		8,101		(12,314)		7,515
	State		2,244		(398)		676
	Non-U.S.		(697)		(4,108)		(2,451)
			9,648		(16,820)		5,740
Total		$	39,949	$	30,479	$	31,211

Reconciliation of effective income tax			2013		2012		2011
Statutory U.S. federal income tax rate		$	44,641	$	31,342	$	35,847
State income taxes, net of federal benefit			2,351		1,472		1,202
Foreign dividend repatriation			467		(9,004)		(536)
Foreign operations			(12,598)		(7,911)		(3,028)
Interest income not taxable in the U.S.			(1,789)		(1,802)		(1,784)
Change in valuation allowance			1,819		5,502		-
Tax impact of special charges, net			5,998		10,209		-
Other			(940)		671		(490)
Total		$	39,949	$	30,479	$	31,211

Deferred income tax balances at each year-end related to					2013		2012
Depreciation and amortization				$	(45,917)	$	(32,731)
Employee benefit costs					35,686		71,100
Foreign tax credit carryforward					14,567		13,510
Tax loss carryforwards					20,781		12,355
Other					14,343		22,669
					39,460		86,903
Valuation allowance					(14,621)		(12,325)
Net deferred tax assets				$	24,839	$	74,578

The difference between the change in the deferred tax assets in the balance sheet and the deferred tax provision is primarily due to the defined benefit pension plan adjustment recorded in accumulated other comprehensive income (loss).

Valuation allowances principally relate to foreign net operating loss carryforwards where the future potential benefits do not meet the more-likely-than-not realization test. The increase in the valuation allowance of $2,296 during 2013 is primarily due to an increase in the valuation allowance on deferred tax assets in our non-U.S. entities that do not meet the more-likely-than-not realization test.

Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those deferred tax assets and liabilities are expected to be realized or settled. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more-likely-than-not to be realized. We believe it is more-likely-than-not that forecasted income and the source of that income, together with the tax effects of the deferred tax liabilities and tax planning strategies, will be sufficient to fully recover the net deferred tax assets. In the event that all or part of the net deferred tax assets are determined not to be realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period such determination is made.

U.S. income taxes have not been provided on approximately $420,407 undistributed earnings of non-U.S. subsidiaries. We intend to indefinitely reinvest these undistributed earnings. In the event these earnings are later distributed to the U.S., such distributions would likely result in additional U.S. tax that may be offset, at least in part by associated foreign tax credits.

While non-U.S. operations have been profitable overall, there are cumulative tax losses of $82,714 in various countries. These tax losses can be carried forward to offset the income tax liabilities on future income in these countries. Cumulative tax losses of $54,590 can be carried forward indefinitely, while the remaining $28,124 of tax losses must be utilized during 2014 to 2021.

The U.S. has a foreign tax credit carryforward of $14,567 which will expire between 2019 and 2023.

The table below sets forth the changes to our gross unrecognized tax benefit as a result of uncertain tax positions, excluding accrued interest, for the fiscal years ended November 30, 2013 and December 1, 2012. We do not anticipate that the total unrecognized tax benefits will change significantly within the next twelve months.

		2013		2012
Balance at beginning of year	$	4,886	$	5,584
Tax positions related to the current year:
Additions		900		1,215

Tax positions related to prior years:
Additions		378		297
Reductions		(160)		(1,844)
Settlements		(105)		(67)
Lapses in applicable statutes of limitation		(748)		(299)
Balance at end of year	$	5,151	$	4,886

Included in the balance of unrecognized tax benefits as of November 30, 2013, are potential benefits of $4,682 that, if recognized, would affect the effective tax rate.

We report accrued interest and penalties related to unrecognized tax benefits in income tax expense. For the year ended November 30, 2013, we recognized a net benefit for interest and penalties of $36 relating to unrecognized tax benefits and had net accumulated accrued interest and penalties of $591 as of November 30, 2013. For the year ended December 1, 2012, we recognized net expense for interest and penalties of $25 relating to unrecognized tax benefits and had net accumulated accrued interest and penalties of $666 as of December 1, 2012.

We are subject to U.S. federal income tax as well as income tax in numerous state and foreign jurisdictions. We are no longer subject to U.S. federal tax examination for years prior to 2010 or Swiss income tax examination for years prior to 2008. There have been no Swiss income tax examinations for 2008 and subsequent years. We are in various stages of examination and appeal in several state and other foreign jurisdictions. Although the final outcomes of these examinations cannot currently be determined, we believe that we have recorded adequate liabilities with respect to these examinations.