Income Taxes

12 Months Ended

Aug. 31, 2011

Income Taxes

Income Taxes

4. Income Taxes

Income tax expense amounted to $98.2 million, $76.5 million, and $160.9 million for fiscal years 2011, 2010 and 2009, respectively (an effective rate of 20.4%, 30.9%, and (16.0)%, respectively). The actual expense differs from the "expected" tax (benefit) expense (computed by applying the U.S. federal corporate tax rate of 35% to income (loss) before income taxes and minority interest) as follows (in thousands):

	Fiscal Year Ended August 31,
	2011			2010			2009
Computed "expected" tax expense (benefit)	$	168,416		$	86,543		$	(351,797	)
State taxes, net of federal benefit		(4,025	)		(1,557	)		(7,134	)
Federal effect of state net operating losses and tax credits		1,337			215			454
Impact of foreign tax rates		(94,392	)		(63,450	)		64,637
Permanent impact of non-deductible cost		4,639			9,116			12,214
Income tax credits		(38,707	)		(7,863	)		39
Changes in tax rates on deferred tax assets and liabilities		10,147			5,020			24,123
Valuation allowance		17,277			19,474			307,938
Non-deductible equity compensation		7,581			9,317			7,501
Impact of intercompany charges		12,658			25,748			19,271
Permanent impact of non-deductible goodwill		—			—			94,562
Other, net		13,298			(6,062	)		(10,910	)
Provision for income taxes	$	98,229		$	76,501		$	160,898
Effective tax rate		20.4	%		30.9	%		(16.0	)%

The domestic and foreign components of income (loss) before taxes and minority interest were composed of the following for the fiscal years ended August 31 (in thousands):

	Fiscal Year Ended August 31,
	2011			2010			2009
U.S.	$	(112,705	)	$	(115,657	)	$	(330,043	)
Foreign		593,892			362,924			(675,090	)
	$	481,187		$	247,267		$	(1,005,133	)

The components of income tax expense (benefit) for the fiscal years ended August 31, 2011, 2010 and 2009 were as follows (in thousands):

Fiscal Year Ended August 31,	Current			Deferred			Total
2011: U.S. – Federal	$	(8,937	)	$	4,123		$	(4,814	)
U.S. – State		1,103			97			1,200
Foreign		102,826			(983	)		101,843
	$	94,992		$	3,237		$	98,229
2010: U.S. – Federal	$	5,845		$	(2,273	)	$	3,572
U.S. – State		2,040			97			2,137
Foreign		66,285			4,507			70,792
	$	74,170		$	2,331		$	76,501
2009: U.S. – Federal	$	(1,439	)	$	71,438		$	69,999
U.S. – State		453			14,310			14,763
Foreign		59,509			16,627			76,136
	$	58,523		$	102,375		$	160,898

The Company has been granted tax incentives for its Brazilian, Chinese, Hungarian, Malaysian, Polish, Singaporean and Vietnamese subsidiaries. The material tax incentives expire through 2020 and are subject to certain conditions with which the Company expects to comply. These subsidiaries generated income during the fiscal years ended August 31, 2011, 2010 and 2009, resulting in a tax benefit of approximately $59.0 million ($0.28 per basic share), $48.3 million ($0.23 per basic share) and $25.7 million ($0.12 per basic share), respectively. As of August 31, 2011, the Company has a foreign investment tax credit of $10.7 million that expires in 2017 and is based on the deferral method.

As of August 31, 2011, the Company has a $3.3 million deferred tax liability related to withholding taxes on an anticipated repatriation of approximately $33.0 million between foreign subsidiaries. The Company does not anticipate any U.S. income taxes on the earnings repatriation. This anticipated repatriation of earnings between foreign subsidiaries does not change the Company's intentions to indefinitely reinvest the remaining income from its foreign subsidiaries. The aggregate undistributed earnings of the Company's foreign subsidiaries for which no deferred tax liability has been recorded is approximately $1.3 billion as of August 31, 2011. Determination of the amount of unrecognized deferred tax liability on these undistributed earnings is not practicable.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows (in thousands):

	Fiscal Year Ended August  31,
	2011			2010
Deferred tax assets:
Net operating loss carry forward	$	269,686		$	193,865
Receivables		5,584			8,265
Inventories		5,798			2,743
Compensated absences		6,566			6,463
Accrued expenses		24,858			34,269
Property, plant and equipment, principally due to differences in depreciation and amortization		12,932			21,765
U.S. foreign tax credits		10,394			9,737
Foreign jurisdiction tax credits		20,044			—
Equity compensation – U.S.		60,634			60,394
Equity compensation – Foreign		8,187			6,884
Cash flow hedges		10,165			11,713
Intangible assets		101,783			88,608
Other		17,884			15,196
Total gross deferred tax assets		554,515			459,902
Less valuation allowance		(469,067	)		(375,301	)
Net deferred tax assets	$	85,448		$	84,601
Deferred tax liabilities:
Other		15,665			12,853
Deferred tax liabilities	$	15,665		$	12,853

Net current deferred tax assets were $10.6 million and $18.1 million at August 31, 2011 and 2010, respectively, and the net non-current deferred tax assets were $59.2 million and $53.6 million at August 31, 2011 and 2010, respectively.

The net change in the total valuation allowance for the fiscal years ended August 31, 2011 and 2010 was $93.8 million and $(58.5) million, respectively. In addition, at August 31, 2011, the Company had federal, state and foreign income tax net operating loss carry forwards of approximately $332.4 million, $28.7 million, and $639.9 million, respectively, which are available to reduce future taxes, if any. These net operating loss carry forwards expire through the year 2031. The Company has U.S. state tax credits and U.S. foreign tax credits of $0.7 million and $10.4 million, respectively, for state and federal carry forwards, which are available to reduce future taxes, if any. The U.S. state tax credits expire through the year 2017. Of the U.S. foreign tax credits, $4.1 million expire through 2021, and the years of expiration for the remaining $6.3 million cannot yet be determined.

Based on the Company's historical operating income (loss), projection of future taxable income, scheduled reversal of taxable temporary differences, and tax planning strategies, management believes that it is more likely than not that the Company will realize the benefit of its deferred tax assets, net of valuation allowances recorded.

At August 31, 2011, the Company had $84.9 million in unrecognized tax benefits, the recognition of which would have an effect of $68.9 million on the effective tax rate. At August 31, 2010, the Company had $78.1 million in unrecognized tax benefits, the recognition of which would have an effect of $71.5 million on the effective tax rate.

A reconciliation of the beginning and ending amount of the consolidated liability for unrecognized income tax benefits for fiscal years 2011 and 2010 are as follows (in thousands):

	Fiscal Year Ended August 31,
	2011			2010			2009
Beginning balance	$	78,140		$	79,576		$	75,178
Additions for tax positions of prior years		2,979			4,931			11,201
Reductions for tax positions of prior years		(12,631	)		(11,669	)		(10,729	)
Additions for tax positions related to current year		18,431			18,249			11,936
Additions for tax positions related to acquired entities		3,648			—			368
Cash settlements		(1,667	)		(3,103	)		(258	)
Reductions from lapses in statutes of limitations		(2,840	)		(4,184	)		(1,609	)
Reductions from settlements with taxing authorities		(5,349	)		(4,450	)		(6,421	)
Foreign exchange rate adjustment		4,231			(1,210	)		(90	)
Ending balance	$	84,942		$	78,140			79,576

Included in the balance of unrecognized tax benefits at August 31, 2011 and August 31, 2010 is $9.4 million and $4.6 million, respectively, for which it is reasonably possible that the amounts could significantly change during the next 12 months. These amounts at August 31, 2011 and August 31, 2010, primarily relate to possible adjustments for transfer pricing, tax holidays, and certain inclusions in taxable income, and include $5.0 million and $0.5 million, respectively, in possible cash payments, and $4.4 million and $4.1 million, respectively, related to the settlement of audits not involving cash payments and the expiration of applicable statutes of limitation.

The Company records the liability for the unrecognized tax benefits as a long term income tax liability on the Consolidated Balance Sheets unless cash settlement is expected in the next 12 months.

The Company's continuing practice is to recognize interest and penalties related to unrecognized tax benefits in income tax expense. The Company's accrued interest and penalties were approximately $23.7 million and $18.5 million at August 31, 2011 and August 31, 2010, respectively. The Company recognized interest and penalties of approximately $5.2 million, $0.9 million and $(1.6) million during the fiscal years ended August 31, 2011, 2010 and 2009, respectively.

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for fiscal years before August 31, 2003.

The Internal Revenue Service ("IRS") completed its field examination of the Company's tax returns for the fiscal years 2003 through 2005 and issued a Revenue Agent's Report ("RAR") on April 30, 2010 proposing adjustments primarily related to the IRS contentions that (1) certain corporate expenses relate to services provided to foreign affiliates and therefore must be charged to those affiliates, and (2) valuable intangible property was transferred to certain foreign affiliates without charge. If the IRS ultimately prevails in its positions, the Company's income tax payment due for the fiscal years 2003 through 2005 would be approximately an additional $69.3 million before utilization of any tax attributes arising in periods subsequent to fiscal year 2005. In addition, the IRS will likely make similar claims in future audits with respect to these types of transactions (at this time, determination of the additional income tax due for these later years is not practicable). Also, the IRS has proposed interest and penalties on the Company with respect to fiscal years 2003 through 2005, and the Company anticipates the IRS may seek to impose interest and penalties in subsequent years with respect to the same types of issues.

The Company disagrees with the proposed adjustments and is vigorously contesting this matter through applicable IRS and judicial procedures, as appropriate. As the final resolution of the proposed adjustments remains uncertain, the Company continues to provide for the uncertain tax position based on the more likely than not standards. Accordingly, the Company did not record any significant additional tax liabilities related to this RAR on the Consolidated Balance Sheets for the fiscal year ended August 31, 2011. While the resolution of the issues may result in tax liabilities, interest and penalties, which are significantly higher than the amounts provided for this matter, management currently believes that the resolution will not have a material effect on the Company's financial position or liquidity. Despite this belief, an unfavorable resolution, particularly if the IRS successfully asserts similar claims for later years, could have a material effect on the Company's results of operations and financial condition (particularly during the quarter in which any adjustment is recorded or any tax is due or paid).