5. Income Taxes

a. Provision for Income Taxes

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


	Fiscal Year Ended August 31,
	2014			2013			2012
U.S.	$	(129,764	)	$	(157,454	)	$	(172,820	)
Non-U.S.		201,887			484,568			609,369

	$	72,123		$	327,114		$	436,549

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


Fiscal Year Ended August 31,		Current		Deferred			Total
2014:	U.S. – Federal	$	3,047	$	(9,108	)	$	(6,061	)
	U.S. – State		319		(3,606	)		(3,287	)
	Non-U.S.		107,819		(24,760	)		83,059

		$	111,185	$	(37,474	)	$	73,711

2013:	U.S. – Federal	$	4,762	$	(109,304	)	$	(104,542	)
	U.S. – State		226		3,044			3,270
	Non-U.S.		129,908		(21,005	)		108,903

		$	134,896	$	(127,265	)	$	7,631

2012:	U.S. – Federal	$	2,072	$	(152	)	$	1,920
	U.S. – State		82		—			82
	Non-U.S.		118,333		(17,469	)		100,864

		$	120,487	$	(17,621	)	$	102,866

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,
	2014			2013			2012
Tax at U.S. federal statutory income tax rate (35%)	$	25,243		$	114,490		$	152,792
State income taxes, net of federal tax benefit		(3,740	)		(6,285	)		(4,013	)
Impact of foreign tax rates		(19,621	)		(130,732	)		(105,746	)
Permanent impact of non-deductible cost		10,995			12,815			1,589
Income tax credits		(5,632	)		(7,170	)		(11,258	)
Changes in tax rates on deferred tax assets and liabilities		(23,432	)		7,416			(9,048	)
Valuation allowance		47,697			(45,502	)		53,490
Non-deductible equity compensation		31,236			21,477			6,655
Impact of intercompany charges		9,376			30,360			1,742
Other, net		1,589			10,762			16,663

Total income tax expense	$	73,711		$	7,631		$	102,866

For the fiscal year ended August 31, 2014, the impact of foreign tax rates change was due to the decrease of income in low tax-rate jurisdictions. The changes in tax rates on deferred tax assets and liabilities decreased due to the enactment of the Mexico 2014 tax reform. For the fiscal year ended August 31, 2013, the valuation allowance decrease was from the partial release of the U.S. valuation allowance due to the Nypro acquisition.

The Company has been granted tax incentives for its Brazilian, Malaysian, Polish, Singaporean and Vietnamese subsidiaries. The majority of the tax incentive benefits expire through 2020 and are subject to certain conditions with which the Company expects to comply. These subsidiaries generated income from continuing operations during the fiscal years ended August 31, 2014, 2013 and 2012, resulting in a tax benefit of approximately $14.6 million ($0.07 per basic share), $51.5 million ($0.25 per basic share) and $42.5 million ($0.21 per basic share), respectively. The benefits of these incentives are recorded as the impact of foreign tax rates and income tax credits.

For the fiscal year ended August 31, 2014, the Company recorded out-of-period adjustments that increased net income from continuing operations by approximately $17.1 million, which related to fiscal year 2013 income tax benefit adjustments that were recorded in fiscal year 2014. The Company assessed and concluded that these adjustments are not material to either the consolidated quarterly or annual financial statements for all impacted periods.

b. Deferred Tax Assets and Liabilities

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


	Fiscal Year Ended August 31,
	2014			2013
Current deferred tax assets	$	64,944		$	45,650
Current deferred tax liabilities		(5,094	)		(6,004	)
Noncurrent deferred tax assets		92,702			91,383
Noncurrent deferred tax liabilities		(61,670	)		(58,047	)

Total net deferred tax assets	$	90,882		$	72,982

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


	Fiscal Year Ended August 31,
	2014			2013
Deferred tax assets:
Net operating loss carry forward	$	236,169		$	272,117
Receivables		7,847			3,567
Inventories		10,139			9,285
Compensated absences		8,396			8,221
Accrued expenses		71,007			45,142
Property, plant and equipment, principally due to differences in depreciation and amortization		23,830			7,555
U.S. federal and state tax credits		63,655			27,048
Foreign jurisdiction tax credits		17,715			18,617
Equity compensation – U.S.		23,101			60,765
Equity compensation – Non-U.S.		4,307			8,886
Cash flow hedges		5,294			7,455
Other		11,432			20,317

Total deferred tax assets before valuation allowances		482,892			488,975
Less valuation allowances		(261,285	)		(280,755	)

Net deferred tax assets	$	221,607		$	208,220

Deferred tax liabilities:
Unremitted earnings of non-U.S. subsidiaries		81,514			80,000
Intangible assets		44,637			43,867
Other		4,574			11,371

Total deferred tax liabilities	$	130,725		$	135,238

Net deferred tax assets	$	90,882		$	72,982

As of August 31, 2014, the Company had federal, state and foreign income tax net operating loss carry forwards of approximately $241.4 million, $35.9 million, and $593.4 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 2015 through 2034 or have an indefinite carry forward period. The Company has U.S. federal and state tax credit carry forwards of $59.2 million and $6.8 million, respectively, which are available to reduce future taxes, if any. Of the U.S. federal tax credits, $52.2 million expire through 2024, $2.3 million have an indefinite carry forward period and the years of expiration for the remaining $4.7 million cannot yet be determined. Most of the U.S. state tax credits expire through the year 2026. As of August 31, 2014, the foreign jurisdiction tax credits include foreign investment tax credits of $12.9 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 in the total valuation allowance for the fiscal years ended August 31, 2014 and 2013 were $19.5 million and $166.9 million, respectively. The fiscal year ended August 31, 2014 decrease is primarily related to the gain on sale of discontinued operations that utilized net operating loss carry forwards and the partial release of the U.S. valuation allowance due to the Nypro acquisition, which were offset by additional losses in sites with existing valuation allowances.

As of August 31, 2014, the Company intends to repatriate the Nypro pre-acquisition undistributed foreign earnings of approximately $221.2 million to the U.S. Therefore, the Company recorded a deferred tax liability of approximately $77.8 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 $2.3 billion as of August 31, 2014. 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,
	2014			2013			2012
Beginning balance	$	219,132		$	113,414		$	84,942
Additions for tax positions of prior years		16,533			82,965			48,986
Reductions for tax positions of prior years		(3,843	)		(7,713	)		(10,446	)
Additions for tax positions related to current year		18,219			30,886			12,316
Adjustments for tax positions related to disposed entities		(1,917	)		—			—
Adjustments for tax positions related to acquired entities		(3,195	)		21,000			—
Cash settlements		(9,406	)		(1,096	)		(7,880	)
Reductions from lapses in statutes of limitations		(1,909	)		(784	)		(2,521	)
Reductions from settlements with taxing authorities		(4,344	)		(19,930	)		(9,680	)
Foreign exchange rate adjustment		414			390			(2,303	)

Ending balance	$	229,684		$	219,132		$	113,414

Unrecognized tax benefits that would affect the effective tax rate (if recognized)	$	72,586		$	72,618		$	65,677

It is reasonably possible that the August 31, 2014 unrecognized tax benefits could decrease during the next 12 months by
$0.9 million from cash payments and by $1.4 million related to the settlement of audits or expiration of applicable statutes of limitations. These amounts primarily relate to possible adjustments for transfer pricing 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 $18.0 million and $17.0 million at August 31, 2014 and 2013, respectively. The Company recognized (derecognized) interest and penalties of approximately $1.0 million, $8.9 million and $(15.6) million during the fiscal years ended August 31, 2014, 2013 and 2012, 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 and August 31, 2004, respectively.