NOTE 11 – INCOME TAXES

The components of earnings before income taxes are as follows:

	2011		2010			2009
Domestic operations	$	108,072	$	15,331		$	(9,193	)
Foreign operations		311,450		312,390			279,979
	$	419,522	$	327,721		$	270,786

The provisions for income taxes consist of the following
items:
Current:
Federal, state and local	$	18,570	$	11,109		$	2,843
Foreign		74,944		80,340			82,966
	$	93,514		91,449			85,809
Deferred:
Federal, state and local		246		(3,050	)		(11,623	)
Foreign		10,266		(1,926	)		981
		10,512		(4,976	)		(10,642	)
	$	104,026	$	86,473		$	75,167

A reconciliation of the provisions for income taxes follows:

	2011		2010		2009
U.S. federal statutory tax rate	35.0	%	35.0	%	35.0	%

Foreign income and withholding taxes,
net of U.S. foreign tax credits	(3.7	)	(3.0	)	(6.9	)
Net unrecognized tax benefit adjustments	(6.0	)	(6.4	)	(0.5	)
Tax credits	(0.9	)	(0.2	)	(0.9	)
Other, net	0.4		1.0		1.1
Effective tax rate	24.8	%	26.4	%	27.8	%

The rate impact for foreign income and withholding taxes, net of U.S. foreign tax credits, reflects the jurisdictional location of earnings, costs of certain repatriation decisions, and uncertain tax positions. The Company operates subsidiaries in Puerto Rico, Switzerland and Singapore which benefit from tax incentives. The Puerto Rico tax incentive grant provides that the Company’s manufacturing operations will be partially exempt from local taxes through the end of fiscal year 2013. The Company is currently in the process of negotiating a new tax incentive grant in Puerto Rico. The Switzerland tax incentive grants provide that the Company’s profits will be partially exempt from local taxes. These grants expire between fiscal year 2018 and 2020. The Singapore tax incentive grant provides that the Company’s profits will be partially exempt from local taxes through the end of fiscal year 2019, with an opportunity to extend ten more years. These tax incentives as compared with the local statutory rates resulted in a reduction of tax expense amounting to $18,504 in 2011, $4,903 in 2010 and $7,421 in 2009.

The rate impact for net unrecognized tax benefit adjustments represents changes in the Company’s net liability for unrecognized tax benefits related to tax positions taken in prior-years, including changes in estimates, tax settlements, and lapses of applicable statutes of limitation. In fiscal year 2011, the Company reversed $22,829 of previously recorded liabilities related to tax and penalties, as well as $7,333 related to interest ($4,668 net of income tax cost) that were accrued but not assessed as part of the Internal Revenue Service (“IRS”) audits of fiscal years 1999 through 2005. In May 2011, the IRS concluded its audit of these years, including the matter previously disclosed for those years in Note 2, Audit Committee Inquiry and Restatement, to the consolidated financial statements included in the 2007 Form 10-K. In closing the audit, the IRS did not assess any penalties. Additionally, $70,079 of current prepaid income tax has been reflected as a reduction of current income taxes payable and current interest payable. The Company will not make any further cash payments to the IRS or receive any refunds with respect to these matters. In fiscal year 2010, the Company reversed $20,602 of previously recorded liabilities related to tax and penalties, as well as $10,420 related to interest ($8,938 net of income tax cost) primarily related to the resolution of foreign tax audits and expiring foreign statutes of limitation for assessment of uncertain tax positions.

As of July 31, 2011, the Company has not provided deferred taxes on approximately $1,101,791 of undistributed foreign subsidiaries’ earnings because it intends to invest substantially all such earnings in its foreign operations indefinitely. The additional U.S. and non-U.S. income and withholding taxes that would arise on the reversal of the temporary differences could be offset, in part, by tax credits. Because the determination of the amount of available tax credits and the limitations imposed on the annual utilization of such credits are subject to a highly complex series of calculations and expense allocations, it is impractical to estimate the amount of net income taxes and withholding taxes that might be payable on the remaining pool of undistributed earnings if a reversal of temporary differences occurred.

The components of the net deferred tax asset at July 31, are as follows:

	2011			2010
Deferred tax asset:
Tax loss and tax credit carry-forwards	$	45,375		$	41,393
Inventories		22,476			32,954
Compensation and benefits		39,220			37,651
Environmental		5,616			4,714
Accrued expenses		27,123			25,999
Amortization		4,767			6,335
Net pensions		58,245			67,970
Other		31,393			20,492
Gross deferred tax asset		234,215			237,508
Valuation allowance		(22,814	)		(23,474	)
Total deferred tax asset		211,401			214,034
Deferred tax liability:
Amortization		(12,213	)		(12,549	)
Plant and equipment		(29,222	)		(25,990	)
Revenue recognition		(5,692	)		(16,591	)
Undistributed foreign earnings		(7,270	)		(3,570	)
Other		(4,096	)		(2,222	)
Total deferred tax liability		(58,493	)		(60,922	)
Net deferred tax asset	$	152,908		$	153,112

Deferred tax assets and liabilities in the preceding table, after netting by taxing jurisdiction, are in the following captions in the consolidated balance sheet at July 31:

	2011			2010
Other current assets	$	67,140		$	62,797
Other non-current assets		97,767			98,282
Accrued liabilities		(1,188	)		(103	)
Deferred income taxes		(10,811	)		(7,864	)
Total	$	152,908		$	153,112

As of July 31, 2011, the Company had available tax net operating loss and tax credit carry forwards subject to expiration as follows:

	Operating
Year of Expiration	Losses		Tax Credits
2012	$	–	$	153
2013-2021		3,709		16,444
2022-2031		–		6,075
Subtotal		3,709		22,672
Indefinite		89,033		–
Total	$	92,742	$	22,672

In addition, the Company has various state net operating loss carryforwards that expire in varying amounts through fiscal year 2031.

In evaluating the Company’s ability to recover deferred tax assets within the jurisdiction from which they arise, management assesses the generation of sufficient taxable income from all sources, including the scheduled reversal of taxable temporary differences, tax-planning strategies and projected future operating income. To the extent the Company does not consider it more likely than not that a deferred tax asset will be recovered, a valuation allowance is established. Based on these considerations, management believes it is more likely than not that the Company will realize the benefit of its deferred tax asset, net of the July 31, 2011 valuation allowance.

The following is a tabular reconciliation of the total amounts of gross unrecognized tax benefits:

	2011			2010			2009
Beginning balance	$	227,256		$	240,683		$	242,287
Increases for tax positions taken during the current year		51,327			31,645			17,753
Increases to tax positions taken in prior years		1,516			3,189			8,203
Decreases to tax positions taken in prior years		(13,998	)		(31,344	)		(16,951	)
Settlements with tax authorities		(72,307	)		(6,260	)		(643	)
Expiration of statutes of limitation		(8,662	)		(6,785	)		–
Translation and other		3,248			(3,872	)		(9,966	)
Ending balance	$	188,380		$	227,256		$	240,683

Included in the balance of unrecognized tax benefits at July 31, 2011, July 31, 2010, and July 31, 2009 respectively, are $127,182, $164,177, and $158,890 of tax benefits that, if recognized, would affect the effective tax rate.

During the fiscal year ended July 31, 2011, the amount of gross unrecognized tax benefits decreased primarily due to the resolution of the U.S. federal tax audit covering fiscal years 1999 through 2005 discussed above, and the expiration of certain foreign statutes of limitation.

The Company files income tax returns in the U.S. and multiple foreign jurisdictions with varying statutes of limitation. In the normal course of business, the Company and its subsidiaries are subject to examination by various taxing authorities. As of July 31, 2011, the Company is subject to U.S. federal and state local income tax examinations for the fiscal tax years ended in 2006 through 2008, and to non-U.S. income tax examinations for the fiscal tax years ended in 2005 through 2009.

During the fiscal year ended July 31, 2011, the Company recorded net earnings from the reversal of interest and penalties of $15,376 and in total, as of July 31, 2011, has recognized a liability of $29,652 related to interest and penalties. During fiscal year ended July 31, 2010, the Company recorded net earnings from the reversal of interest and penalties of $8,992 and in total, as of July 31, 2010, had recognized a liability of $62,546 related to interest and penalties. During the fiscal year ended July 31, 2009, the Company accrued interest and penalties of $7,011.

Due to the potential resolution of tax examinations and the expiration of various statutes of limitation, the Company believes that it is reasonably possible that the gross amount of unrecognized tax benefits may decrease within the next twelve months by a range of zero to $7,019.