Income Taxes

12 Months Ended

Jun. 30, 2011

NOTE 12 - INCOME TAXES

Income from continuing operations before income taxes consisted of the following for the years ended June 30:


(in thousands)	2011			2010			2009

Income (loss) from continuing operations before income taxes:
United States	$	69,042		$	3,925		$	(135,133	)
International		227,091			72,677			22,637

Total income (loss) from continuing operations before income taxes	$	296,133		$	76,602		$	(112,496	)

Current income taxes:
Federal	$	26,234		$	1,915		$	(25,071	)
State		1,063			1,376			2,019
International		44,440			23,456			21,169

Total current income taxes		71,737			26,747			(1,883	)
Deferred income taxes		(7,881	)		230			(9,322	)

Provision (benefit) for income taxes	$	63,856		$	26,977		$	(11,205	)

Effective tax rate		21.6	%		35.2	%		10.0	%

The reconciliation of income taxes computed using the statutory U.S. income tax rate and the provision (benefit) for income taxes was as follows for the years ended June 30:


(in thousands)	2011			2010			2009

Income taxes at U.S. statutory rate	$	103,647		$	26,811		$	(39,374	)
State income taxes, net of federal tax benefits		1,956			2,290			(131	)
U.S. income taxes provided on international income		21,556			1,107			(47	)
Combined tax effects of international income		(35,423	)		(4,460	)		4,029
Change in valuation allowance and other uncertain tax positions		(20,215	)		2,024			(4,638	)
Impact of goodwill impairment charges		-			-			29,296
Impact of domestic production activities deduction		(6,413	)		(456	)		672
Research and development credit		(2,685	)		(460	)		(1,501	)
Other		1,433			121			489

Provision (benefit) for income taxes	$	63,856		$	26,977		$	(11,205	)

During 2011, we recorded net valuation allowance adjustments of $20.5 million, which reduced income tax expense. The valuation allowance adjustments reflect a change in judgment about the realizability of certain deferred tax assets in the United Kingdom and Europe. The effect of this tax benefit is included in the income tax reconciliation table under the caption “change in valuation allowance and other uncertain tax positions.”

During 2011, we incurred U.S. Federal income taxes of $17.9 million associated with dividends of international subsidiary current year income. The effect of this expense is included in the income tax reconciliation table under the caption “U.S. income taxes provided on international income.”

During 2010, we recorded restructuring charges related to our engineered products business for which there was no tax benefit. The effect of this is included in the income tax reconciliation table under the caption “combined tax effects of international income.”

During 2009, we recorded goodwill impairment charges related to our surface finishing machines and services business and our engineered products business for the majority of which there was no tax benefit. The federal effect of these permanent differences is included in the income tax reconciliation table under the caption “impact of goodwill impairment charges.”

During 2009, the Internal Revenue Service completed its examination of our 2005 and 2006 tax years, which resulted in a net tax benefit of $1.8 million, including the impact of state taxes and interest. The federal effect of this benefit is included in the income tax reconciliation table under the caption “change in valuation allowance and other uncertain tax positions.”

During 2009, we recorded a valuation allowance adjustment of $2.8 million, which reduced income tax expense. This valuation allowance adjustment reflects a change in circumstances that caused a change in judgment about the realizability of certain deferred tax assets in Europe. The effect of this tax benefit is included in the income tax reconciliation table under the caption “change in valuation allowance and other uncertain tax positions.”

The components of net deferred tax assets and liabilities were as follows at June 30:


(in thousands)	2011			2010

Deferred tax assets:
Net operating loss carryforwards	$	65,768		$	61,605
Inventory valuation and reserves		29,646			29,302
Pension benefits		713			15,913
Other postretirement benefits		8,312			10,499
Accrued employee benefits		30,975			22,551
Other accrued liabilities		7,939			6,755
Hedging activities		13,528			9,785
Tax credits and other carryforwards		5,431			5,541
Other		2,558			7,953

Total		164,870			169,904
Valuation allowance		(25,662	)		(47,987	)

Total deferred tax assets	$	139,208		$	121,917


Deferred tax liabilities:
Tax depreciation in excess of book	$	98,957		$	79,712
Intangible assets		35,965			33,271

Total deferred tax liabilities	$	134,922		$	112,983

Total net deferred tax assets (liabilities)	$	4,286		$	8,934

Included in deferred tax assets at June 30, 2011 is $65.8 million associated with net operating loss carryforwards in foreign and state jurisdictions. Of that amount, $9.3 million expires through June 2016, $6.8 million expires through 2021, $4.3 million expires through 2026, $6.9 million expires through 2031, and the remaining $38.5 million do not expire. The realization of these tax benefits is primarily dependent on future taxable income in these jurisdictions.

A valuation allowance of $25.7 million has been placed against deferred tax assets in Europe, China, Hong Kong, Mexico, Brazil and the U.S., which would be allocated to income tax expense upon realization of these tax benefits. In 2011, the valuation allowance related to these deferred tax assets decreased $22.3 million. As the respective operations generate sufficient income, the valuation allowances will be partially or fully reversed at such time we believe it will be more likely than not that the deferred tax assets will be realized. In 2011, a change in judgment about the realizability of certain deferred tax assets in the United Kingdom resulting in the valuation allowance of $21.5 million being reversed.

June 30, 2011 unremitted earnings of our non-U.S. subsidiaries and affiliates of $1,084.5 million, the majority of which have not been previously taxed in the U.S., are permanently reinvested, and accordingly, no deferred tax liability has been recorded in connection therewith. It is not practical to estimate the income tax effect that might be incurred if cumulative prior year earnings not previously taxed in the U.S. were remitted to the U.S.

A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding interest) is as follows as of June 30:


(in thousands)	2011			2010

Balance at beginning of year	$	16,391		$	15,817
Increases for tax positions of prior years		-			1,303
Decreases for tax positions of prior years		(85	)		(184	)
Increases for tax positions related to the current year		285			2,390
Decreases related to settlement with taxing authority		-			(1,190	)
Decreases related to lapse of statute of limitations		(794	)		-
Foreign currency translation		2,492			(1,745	)

Balance at end of year	$	18,289		$	16,391

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate in 2011, 2010 and 2009 is $18.0 million, $15.8 million and $15.2 million, respectively. Our policy is to recognize interest and penalties related to income taxes as a component of the provision for income taxes in the consolidated statement of income. We recognized interest expense of $0.9 million, $0.4 million and an interest reduction of $0.8 million for 2011, 2010 and 2009, respectively. As of June 30, 2011 and 2010 the amount of interest accrued was $3.2 million and $2.0 million, respectively.

With few exceptions, we are no longer subject to income tax examinations by tax authorities for years prior to 2002. The Internal Revenue Service has audited all U.S. tax years prior to 2009 and is currently examining 2009 and 2010. Various state and foreign jurisdiction tax authorities are in the process of examining our income tax returns for various tax years ranging from 2002 to 2010. We continue to execute and expand our pan-European business model. As a result of this and other matters, we continuously review our uncertain tax positions and evaluate any potential issues that may lead to an increase or decrease in the total amount of unrecognized tax benefits recorded. We believe that it is reasonably possible that the amount of unrecognized tax benefits could decrease by approximately $13.0 million to $14.0 million within the next twelve months as a result of the progression of various federal, state, and foreign audits in process.