4. Income Taxes

a. Provision for Income Taxes

Income (loss) before income tax expense and noncontrolling interests is summarized below (in thousands):


	Fiscal Year Ended August 31,
	2013			2012			2011
U.S.	$	(117,312	)	$	(147,567	)	$	(112,705	)
Non-U.S.		503,376			656,467			593,892

	$	386,064		$	508,900		$	481,187

Income tax expense (benefit) is summarized below (in thousands):


Fiscal Year Ended August 31,		Current			Deferred			Total
2013:	U.S. – Federal	$	4,762		$	(108,779	)	$	(104,017	)
	U.S. – State		567			3,391			3,958
	Non-U.S.		136,602			(20,570	)		116,032

		$	141,931		$	(125,958	)	$	15,973

2012:	U.S. – Federal	$	2,240		$	2,172		$	4,412
	U.S. – State		279			462			741
	Non-U.S.		125,646			(17,988	)		107,658

		$	128,165		$	(15,354	)	$	112,811

2011:	U.S. – Federal	$	(8,937	)	$	4,123		$	(4,814	)
	U.S. – State		1,103			97			1,200
	Non-U.S.		102,826			(983	)		101,843

		$	94,992		$	3,237		$	98,229

Reconciliations of the income tax expense at the U.S. federal statutory income tax rate compared to the actual income tax expense are summarized below (in thousands):


	Fiscal Year Ended August 31,
	2013			2012			2011
Tax at U.S. federal statutory income tax rate (35%)	$	135,122		$	178,115		$	168,416
State income taxes, net of federal tax benefit		(6,285	)		(4,013	)		(2,688	)
Impact of foreign tax rates		(141,443	)		(116,198	)		(94,392	)
Permanent impact of non-deductible cost		13,212			2,147			4,639
Income tax credits		(8,643	)		(13,125	)		(38,707	)
Changes in tax rates on deferred tax assets and liabilities		7,416			(9,048	)		10,147
Valuation allowance		(47,294	)		57,743			17,277
Non-deductible equity compensation		21,410			6,655			7,581
Impact of intercompany charges		30,106			1,742			12,658
Other, net		12,372			8,793			13,298

Total income tax expense	$	15,973		$	112,811		$	98,229

The valuation allowance decrease from the previous period is primarily related to a $104.0 million partial release of the U.S. valuation allowance related to the U.S. deferred tax liabilities from the Nypro acquisition, which represent future sources of taxable income to support the realization of the deferred tax assets.

The Company has been granted tax incentives for its Brazilian, 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, 2013, 2012 and 2011, resulting in a tax benefit of approximately $52.4 million ($0.26 per basic share), $42.1 million ($0.20 per basic share) and $59.0 million ($0.28 per basic share), respectively. The benefits of these incentives are recorded as the impact of foreign tax rates and income tax credits.

b. Deferred Tax Assets and Liabilities

The current and noncurrent net deferred tax assets are summarized below (in thousands):


	Fiscal Year Ended August 31,
	2013			2012
Current deferred tax assets	$	46,260		$	27,833
Current deferred tax liabilities		(6,253	)		(3,955	)
Noncurrent deferred tax assets		94,069			73,411
Noncurrent deferred tax liabilities		(73,173	)		(24,245	)

Total net deferred tax assets	$	60,903		$	73,044

The significant components of the deferred tax assets and liabilities are summarized below (in thousands):


	Fiscal Year Ended August 31,
	2013		2012
Deferred tax assets:
Net operating loss carry forward	$	293,008	$	280,196
Receivables		3,638		3,275
Inventories		11,730		10,909
Compensated absences		9,699		7,957
Accrued expenses		54,217		49,318
Property, plant and equipment, principally due to differences in depreciation and amortization		4,606		12,644
U.S. federal and state tax credits		32,402		18,708
Foreign jurisdiction tax credits		18,617		13,587


	Fiscal Year Ended August 31,
	2013			2012
Equity compensation – U.S.		60,765			65,800
Equity compensation – Non-U.S.		8,886			8,807
Cash flow hedges		7,455			8,616
Intangible assets		—			69,885
Capital loss carryforward		8,643			8,845
Other		21,759			12,362

Total deferred tax assets before valuation allowances		535,425			570,909
Less valuation allowances		(318,611	)		(487,745	)

Net deferred tax assets	$	216,814		$	83,164

Deferred tax liabilities:
Unremitted earnings of non-U.S. subsidiaries		80,000			—
Intangible assets		63,277			—
Other		12,634			10,120

Total deferred tax liabilities	$	155,911		$	10,120

Net deferred tax assets	$	60,903		$	73,044

As of August 31, 2013, the Company had federal, state and foreign income tax net operating loss carry forwards of approximately $424.1 million, $36.8 million, and $532.3 million, respectively, which are available to reduce future taxes, if any. The net operating loss carry forwards in the Company’s major tax jurisdictions expire in fiscal years 2014 through 2033 or have an indefinite carry forward period. The Company has U.S. federal and state tax credit carry forwards of $27.6 million and $7.4 million, respectively, which are available to reduce future taxes, if any. Of the U.S. federal tax credits, $19.5 million expire through 2023, and the years of expiration for the remaining $8.1 million cannot yet be determined. Most of the U.S. state tax credits expire through the year 2026. As of August 31, 2013, the foreign jurisdiction tax credits include foreign investment tax credits of $11.5 million that expire in 2017 and are based on the deferral method.

Based on the Company’s historical operating income, 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. The net (decreases) increases in the total valuation allowance for the fiscal years ended August 31, 2013 and 2012 were $(169.1) million and $18.7 million, respectively. The fiscal year ended August 31, 2013 decrease is primarily related to a partial release of the U.S. valuation allowance due to the U.S. deferred tax liabilities from the Nypro acquisition, expired or Internal Revenue Code Section 382 limited federal net operating loss carry forwards, expired foreign net operating loss carry forwards, and an increase in non-U.S. unrecognized tax benefits. These decreases were partially offset by net operating losses in sites with existing valuation allowances and increases related to non-U.S. entities in the Nypro acquisition.

As of August 31, 2013, the Company intends to repatriate the Nypro pre-acquisition undistributed foreign earnings of approximately $240.0 million to the U.S. Therefore, the Company recorded a deferred tax liability of approximately $80.0 million based on the anticipated U.S. income taxes of the repatriation. The Company intends to indefinitely reinvest the remaining earnings 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 $2.0 billion as of August 31, 2013. Determination of the amount of unrecognized deferred tax liability on these undistributed earnings is not practicable.

c. Unrecognized Tax Benefits

Reconciliations of the unrecognized tax benefits are summarized below (in thousands):


	Fiscal Year Ended August 31,
	2013			2012			2011
Beginning balance	$	116,661		$	84,942		$	78,140
Additions for tax positions of prior years		83,115			48,986			2,979
Reductions for tax positions of prior years		(7,713	)		(10,446	)		(12,631	)
Additions for tax positions related to current year		30,886			12,316			18,431


	Fiscal Year Ended August 31,
	2013			2012			2011
Additions for tax positions related to acquired entities		21,000			3,275			3,648
Cash settlements		(1,177	)		(7,880	)		(1,667	)
Reductions from lapses in statutes of limitations		(784	)		(2,521	)		(2,840	)
Reductions from settlements with taxing authorities		(20,166	)		(9,680	)		(5,349	)
Foreign exchange rate adjustment		406			(2,331	)		4,231

Ending balance	$	222,228		$	116,661		$	84,942

Unrecognized tax benefits that would affect the effective tax rate (if recognized)	$	75,714		$	68,924		$	68,859

It is reasonably possible that the August 31, 2013 unrecognized tax benefits could decrease during the next 12 months by $8.1 million from cash payments and by $7.3 million related to the settlement of audits or expiration of applicable statutes of limitations. These amounts primarily relate to possible adjustments for transfer pricing, tax holidays, and certain inclusions in taxable income.

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 $18.1 million and $9.2 million at August 31, 2013 and August 31, 2012, respectively. The Company recognized (derecognized) interest and penalties of approximately $8.9 million, $(14.5) million and $5.2 million during the fiscal years ended August 31, 2013, 2012 and 2011, respectively. The Company is no longer subject to U.S. federal income tax examinations for fiscal years before August 31, 2009. In addition, the Company is also subject to audits by state, local, and non-U.S. taxing authorities. In major state and major non-U.S. jurisdictions, the Company is no longer subject to income tax examinations 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 fiscal years 2006 through 2008 and issued Revenue Agent’s Reports (“RAR”) on April 30, 2010 and April 25, 2012, respectively. The proposed 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. On August 30, 2013, the tax return audit for fiscal years 2003 through 2008 was effectively settled when the Company agreed to the IRS Office of Appeals’ adjustments on Form 870-AD (Offer to Waive Restrictions on Assessment and Collection of Tax Deficiency and to Accept Overassessment), which were substantially lower than the initial RAR proposed adjustments. The settlement did not have a material effect on the Company’s financial position or liquidity and no additional tax liabilities were recorded.