INCOME TAXES

The components of earnings from continuing operations before income taxes are as follows:



	2012		2011		2010
Domestic operations	$	63,018	$	64,213	$	(24,843	)
Foreign operations	303,892		304,506		297,438
	$	366,910	$	368,719	$	272,595



The provisions for income taxes consist of the following items:
Current:
Federal, state and local	$	32,016		$	2,779	$	(3,353	)
Foreign	63,042			76,231		78,471
	95,058			79,010		75,118
Deferred:
Federal, state and local	(7,187		)	246		(3,050		)
Foreign	(1,908		)	10,266		(1,926		)
	(9,095		)	10,512		(4,976		)
	$	85,963		$	89,522	$	70,142

A reconciliation of the provisions for income taxes follows:



	2012		2011		2010
U.S. federal statutory tax rate	35.0	%	35.0	%	35.0	%
Foreign income and withholding taxes, net of U.S. foreign tax credits	(10.9	)	(3.3	)	(2.5	)
Net unrecognized tax benefit adjustments	(0.8	)	(6.8	)	(7.7	)
Tax credits	(0.4	)	(1.0	)	(0.2	)
Other, net	0.5		0.4		1.1
Effective tax rate	23.4	%	24.3	%	25.7	%

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 in the final stages of negotiating a new tax incentive grant with Puerto Rico that is expected to extend similar benefits for an additional fifteen years. 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 from total operations amounting to $19,595 in 2012, $20,505 in 2011 and $4,903 in 2010.

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 the fourth quarter of fiscal year 2012, the Company reached a formal agreement with the Internal Revenue Service (“IRS”) resolving certain tax positions that are part of the income tax examination for fiscal years ended 2006 through 2008. As a result, the Company reversed $439 of previously recorded liabilities related to tax and penalties, as well as $4,003 related to interest ($2,549 net of income tax cost) that were accrued but not assessed as part of the IRS agreement. 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 IRS audit 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. In fiscal year 2011, $70,079 of current prepaid income tax has been reflected as a reduction of current income taxes payable and current interest payable. 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, 2012, the Company has not provided deferred taxes on approximately $1,276,917 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:



	2012			2011
Deferred tax asset:
Tax loss and tax credit carry-forwards	$	67,428		$	45,375
Inventories	25,331			22,476
Compensation and benefits	40,046			39,220
Environmental	4,354			5,616
Accrued expenses	29,514			27,123
Amortization	3,271			4,767
Net pensions	80,901			58,245
Other	31,688			31,393
Gross deferred tax asset	282,533			234,215
Valuation allowance	(20,536		)	(22,814		)
Total deferred tax asset	261,997			211,401
Deferred tax liability:
Amortization	(46,320		)	(12,213		)
Plant and equipment	(34,798		)	(29,222		)
Revenue recognition	(1,754		)	(5,692		)
Undistributed foreign earnings	(10,799		)	(7,270		)
Other	(2,817		)	(4,096		)
Total deferred tax liability	(96,488		)	(58,493		)
Net deferred tax asset	$	165,509		$	152,908

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:



	2012			2011
Other current assets	$	80,259		$	67,140
Other non-current assets	95,182			97,767
Accrued liabilities	(1,052		)	(1,188		)
Deferred income taxes	(8,880		)	(10,811		)
Total	$	165,509		$	152,908

As of July 31, 2012, the Company had available tax net operating loss and tax credit carry forwards subject to expiration as follows:



Year of Expiration	Operating Losses		Tax Credits
2013	$	—	$	337
2014-2022	4,311		29,894
2023-2032	21,308		5,211
Subtotal	25,619		35,442
Indefinite	74,809		817
Total	$	100,428	$	36,259

In addition, the Company has various state net operating loss carryforwards that expire in varying amounts through fiscal year 2032.

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, 2012 valuation allowance.

The following is a tabular reconciliation of the total amounts of gross unrecognized tax benefits at July 31:



	2012			2011			2010
Beginning balance	$	188,380		$	227,256		$	240,683
Increases for tax positions taken during the current year	40,413			51,327			31,645
Increases to tax positions taken in prior years	7,940			1,516			3,189
Decreases to tax positions taken in prior years	(1,945		)	(13,998		)	(31,344		)
Settlements with tax authorities	(30,475		)	(72,307		)	(6,260		)
Expiration of statutes of limitation	(4,885		)	(8,662		)	(6,785		)
Translation and other	(4,599		)	3,248			(3,872		)
Ending balance	$	194,829		$	188,380		$	227,256

Included in the balance of unrecognized tax benefits as of July 31, 2012, July 31, 2011, and July 31, 2010 are $137,413, $127,182, and $164,177, respectively, of tax benefits that, if recognized, would affect the effective tax rate.

During the fiscal year ended July 31, 2012, the amount of gross unrecognized tax benefits increased primarily due to tax positions taken during the fiscal year, partially offset by the settlement of certain tax positions that are part of the IRS income tax examinations for fiscal years ended 2006 through 2008, the impact of foreign currency translation and the expiration of various foreign statues of limitations.

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, 2012, the Company is subject to U.S. federal and state local income tax examinations for the fiscal tax years ended in 2006 through 2010, and to non-U.S. income tax examinations for the fiscal tax years ended in 2005 through 2009. During fiscal year 2012, the Company reclassified $57,126 of income taxes payables and $17,870 of interest payable from non-current liabilities to current liabilities, respectively, in anticipation of resolving certain income tax examinations.

Expenses for interest and penalties were offset by reversals resulting in net earnings in fiscal years 2012, 2011 and 2010 of $292, $15,376 and $8,992, respectively. The liability related to interest and penalties recorded at July 31, 2012 and July 31, 2011 was $25,314 and $29,652, respectively.

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 $27,503.