Income Taxes

Cooper's effective tax rate (ETR) (provision for income taxes divided by pretax income) for fiscal year 2014 was 8.3% and fiscal year 2013 was 4.9%. The increase in the ETR in fiscal 2014 reflects the inclusion in the fiscal 2013 ETR of several discrete items causing a reduction in that year. These items related primarily to the statutory income tax rate reduction in the United Kingdom and the renewal of the R&D tax credit in the United States. The ETR is below the United States statutory rate as a majority of our income is earned in foreign jurisdictions with lower tax rates reflecting the shift in the geographic mix of income during recent periods with income earned in foreign jurisdictions increasing as compared to income earned in the United States. As a result, the ratio of domestic income to worldwide income has decreased over recent fiscal periods effectively lowering the overall tax rate due to the fact that the tax rates in the majority of foreign jurisdictions where the Company operates are significantly lower than the statutory rate in the United States.

The components of income from continuing operations before income taxes and extraordinary items and the income tax provision related to income from all operations in our Consolidated Statements of Income consist of:



Years Ended October 31, (In thousands)	2014		2013		2012
Income before income taxes:
United States	$	32,554	$	38,911	$	40,650
Foreign	263,980		273,360		234,802
	$	296,534	$	312,271	$	275,452
Income tax provision	$	24,705	$	15,365	$	26,808

The income tax provision (benefit) related to income from continuing operations in our Consolidated Statements of Income consists of:



Years Ended October 31, (In thousands)	2014			2013			2012
Current:
Federal	$	22,988		$	21,605		$	17,863
State	1,127			1,053			1,400
Foreign	16,595			9,895			14,351
	40,710			32,553			33,614

Deferred:
Federal	(5,278		)	(8,058		)	(3,573		)
State	(871		)	(815		)	(851		)
Foreign	(9,856		)	(8,315		)	(2,382		)
	(16,005		)	(17,188		)	(6,806		)
Income tax provision	$	24,705		$	15,365		$	26,808

We reconcile the provision for income taxes attributable to income from operations and the amount computed by applying the statutory federal income tax rate of 35% to income before income taxes as follows:



Years Ended October 31, (In thousands)	2014			2013			2012
Computed expected provision for taxes	$	103,787		$	109,295		$	96,408
(Decrease) increase in taxes resulting from:
Income earned outside the United States subject to different tax rates	(85,503		)	(97,002		)	(71,282		)
State taxes, net of federal income tax benefit	525			525			294
Foreign source income subject to United States tax	796			294			—
Research and development credit	(126		)	(2,066		)	(131		)
Incentive stock option compensation and non-deductible employee compensation	441			371			347
Tax accrual adjustment	3,786			2,854			665
Other, net	999			1,094			507
Actual provision for income taxes	$	24,705		$	15,365		$	26,808

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



October 31, (In thousands)	2014			2013
Deferred tax assets:
Accounts receivable, principally due to allowances for doubtful accounts	$	1,355		$	1,145
Inventories	4,442			4,812
Litigation settlements	116			184
Accrued liabilities, reserves and compensation accruals	38,108			36,377
Restricted stock	24,677			19,925
Net operating loss carryforwards	6,245			3,555
Plant and equipment	5,701			5,514
Research and experimental expenses - Section 59(e)	3,822			5,318
Tax credit carryforwards	11,623			11,091
Total gross deferred tax assets	96,089			87,921
Less valuation allowance	(14,506		)	(968		)
Deferred tax assets	81,583			86,953
Deferred tax liabilities:
Tax deductible goodwill	(24,207		)	(21,575		)
Transaction cost	(1,144		)	(1,144		)
Foreign deferred tax liabilities	(41,942		)	(10,179		)
Other intangible assets	(27,880		)	(20,195		)
Bonus adjustments under new accounting method	—			(1,300		)
Total gross deferred tax liabilities	(95,173		)	(54,393		)
Net deferred tax (liabilities) assets	$	(13,590	)	$	32,560

Current deferred tax liabilities of $20 thousand at October 31, 2014, and $20 thousand at October 31, 2013, are included in other accrued liabilities on the balance sheet.

In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, we believe it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at October 31, 2014. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. During the year ended October 31, 2012, we recorded in purchase accounting deferred tax assets in connection with our acquisition of Origio a/s and subsidiaries. A valuation allowance of $1.1 million was recorded in the process for Origio's capital loss arising from a building write-down expense related to the former headquarters location in Jyllig, Denmark. During the fiscal third quarter of 2013, we revalued the deferred tax assets and liabilities residing in Denmark, along with the related valuation allowance, to reflect the newly enacted tax rate change that incrementally decreased the corporate tax rate. As a result, the valuation allowance was reduced to $1.0 million.

For the year ended October 31, 2014, we recorded in purchase accounting deferred tax assets in connection with its acquisition of Sauflon Pharmaceuticals, Ltd., and subsidiaries. A valuation allowance of $13.5 million was set up against Sauflon Hungary's development tax credits.

We have not provided for federal income tax on approximately $1.7 billion of undistributed earnings of our foreign subsidiaries since we intend to reinvest this amount outside the United States indefinitely.

At October 31, 2014, we had federal net operating loss carryforwards of $9.8 million and state net operating loss carryforwards of $40.4 million. We also had federal net operating loss carryforwards of $4.3 million related to share option exercises as of October 31, 2014. A tax benefit and a credit to additional paid-in capital for the excess deduction would not be recognized until such deduction reduces taxes payable. Additionally, we had $6.6 million of federal alternative minimum tax credits, $4.2 million of federal research credits and $0.8 million of California research credits. The federal net operating loss and federal research credits carryforwards expire on various dates between 2026 through 2034, and the federal alternative minimum tax credits carry forward indefinitely. The state net operating loss carryforwards expire on various dates between 2019 through 2034, and the California research credits carry forward indefinitely. The net operating loss and other tax credits may be subject to certain limitations upon utilization under Section 382 of the Internal Revenue Code.

The aggregated changes in the balance of gross unrecognized tax benefits were as follows:



(In millions)
Balance at October 31, 2012	$	28.1
(Decrease) from prior year's UTB's	(1.3		)
Increase from current year's UTB's	6.4
UTB (decrease) from expiration of statute of limitations	(6.8		)
Balance at October 31, 2013	26.4
Increase from prior year's UTB's	2.5
Increase from current year's UTB's	6.0
UTB (decrease) from expiration of statute of limitations	(3.5		)
Balance at October 31, 2014	$	31.4

As of October 31, 2014, we had unrecognized tax benefits of $32.0 million, including $4.1 million of related accrued interest and penalties that, if recognized, would affect our effective tax rate. It is our policy to recognize interest and penalties directly related to incomes taxes as additional income tax expense.

Included in the balance of unrecognized tax benefits at October 31, 2014, is $10.2 million related to tax positions for which it is reasonably possible that the total amounts could significantly change during the next twelve months. This amount represents a decrease in unrecognized tax benefits related to expiring statutes in various jurisdictions worldwide and is comprised of transfer pricing and other items.

We are required to file income tax returns in the United States federal jurisdiction, various state and local jurisdictions, and many foreign jurisdictions.

As of October 31, 2014, the tax years for which we remain subject to United States federal income tax assessment upon examination are 2011 through 2013, as well as other major tax jurisdictions including the United Kingdom, Japan and France. We remain subject to income tax examinations in Australia for the tax years 2010 through 2013.