Income Taxes

12 Months Ended

Aug. 31, 2016

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,
				2016		2015		2014
			U.S.	$	(317,427)	$	(295,521)	$	(129,764)
			Non-U.S.		704,472		727,167		201,887
				$	387,045	$	431,646	$	72,123

		The U.S. and non-U.S. components of income (loss) from continuing operations before income tax expense and noncontrolling
	interests include the elimination of intercompany foreign dividends paid to the U.S.

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

	Fiscal Year Ended August 31,		Current		Deferred		Total
	2016:	U.S. – Federal	$	(649)	$	73	$	(576)
		U.S. – State		(166)		9		(157)
		Non-U.S.		157,069		(24,187)		132,882
			$	156,254	$	(24,105)	$	132,149
	2015:	U.S. – Federal	$	1,169	$	(1,653)	$	(484)
		U.S. – State		164		(300)		(136)
		Non-U.S.		147,199		(9,118)		138,081
			$	148,532	$	(11,071)	$	137,461
	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

	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,
			2016		2015		2014
		Tax at U.S. federal statutory income tax rate (35%)	$	135,470	$	151,076	$	25,243
		State income taxes, net of federal tax benefit		(5,121)		(4,474)		(3,740)
		Impact of foreign tax rates		(144,521)		(157,827)		(19,621)
		Permanent impact of non-deductible cost		3,408		8,951		10,995
		Income tax credits		(5,040)		(12,773)		(5,632)
		Changes in tax rates on deferred tax assets and liabilities		182		(1,206)		(23,432)
		Valuation allowance		11,770		72,604		47,697
		Non-deductible equity compensation		18,350		11,600		31,236
		Impact of intercompany charges and dividends		94,596		49,843		9,376
		Other, net		23,055		19,667		1,589
		Total income tax expense	$	132,149	$	137,461	$	73,711

For the fiscal years ended August 31, 2016 and 2015, the impact of intercompany charges and dividends increased due to the intercompany foreign dividend paid to the U.S. which was offset by a decrease in the U.S. valuation allowance. 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.

The Company has been granted tax incentives for its Brazilian, Chinese, Malaysian, Polish, Singaporean and Vietnamese subsidiaries. The majority of the tax incentive benefits expire at various dates through fiscal year 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, 2016, 2015 and 2014, resulting in a tax benefit of approximately $50.5 million ($0.27 per basic share), $74.7 million ($0.39 per basic share) and $14.6 million ($0.07 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 significant components of the deferred tax assets and liabilities are summarized below (in thousands):

				Fiscal Year Ended August 31,
				2016		2015
	Deferred tax assets:
		Net operating loss carry forward		$	319,685	$	261,495
		Receivables			8,643		11,343
		Inventories			6,970		7,876
		Compensated absences			9,080		9,342
		Accrued expenses			75,749		75,580
		Property, plant and equipment, principally due to differences in
			depreciation and amortization		52,088		31,888
		U.S. federal and state tax credits			58,725		63,927
		Foreign jurisdiction tax credits			14,464		13,524
		Equity compensation – U.S.			17,641		21,447
		Equity compensation – Non-U.S.			3,873		4,507
		Cash flow hedges			2,055		3,809
		Other			18,767		25,403
		Total deferred tax assets before valuation allowances			587,740		530,141
		Less valuation allowances			(344,828)		(304,820)
		Net deferred tax assets		$	242,912	$	225,321
	Deferred tax liabilities:
		Unremitted earnings of non-U.S. subsidiaries			88,445		85,765
		Intangible assets			54,130		55,208
		Other			5,768		4,756
		Total deferred tax liabilities		$	148,343	$	145,729
	Net deferred tax assets			$	94,569	$	79,592

As of August 31, 2016, the Company had federal, state (tax-effected) and foreign income tax net operating loss carry forwards (net of unrecognized tax benefits) of approximately $398.4 million, $48.5 million, and $565.3 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 2017 through 2036 or have an indefinite carry forward period. The Company has U.S. federal and state tax credit carry forwards of $55.0 million and $5.7 million, respectively, which are available to reduce future taxes, if any. Most of the U.S. federal tax credits expire through the year 2024. Most of the U.S. state tax credits expire through the year 2027. As of August 31, 2016, the foreign jurisdiction tax credits include foreign investment tax credits of $11.7 million that expire in 2026 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 increases (decreases) in the total valuation allowance for the fiscal years ended August 31, 2016 and 2015 were $40.0 million and $43.5 million, respectively. The fiscal year ended August 31, 2016 increase is primarily related to losses in jurisdictions with existing valuation allowances and the recognition of excess tax benefits due to the early adoption of the new accounting guidance for share-based payment transactions.

As of August 31, 2016, the Company intends to repatriate the Nypro pre-acquisition undistributed foreign earnings of approximately $181.1 million to the U.S. Therefore, the Company continues to record a deferred tax liability of approximately $80.0 million based on the anticipated U.S. income taxes of the repatriation. The Company repatriated $225.3 million of current year foreign earnings to our U.S. operations during fiscal year 2016, which had no income statement impact due to the U.S. current year operating loss and the U.S. valuation allowance. The Company intends to indefinitely reinvest the remaining earnings from its foreign subsidiaries. The accumulated earnings are the most significant component of the basis difference which is indefinitely reinvested. The aggregate undistributed earnings of the Company’s foreign subsidiaries for which no deferred tax liability has been recorded is approximately $3.1 billion as of August 31, 2016. 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,
				2016		2015		2014
		Beginning balance		$	154,648	$	229,684	$	219,132
		Additions for tax positions of prior years			7,974		4,189		16,533
		Reductions for tax positions of prior years			(20,045)		(7,919)		(3,843)
		Additions for tax positions related to current year			25,892		21,541		18,219
		Adjustments for tax positions related to disposed entities			―		―		(1,917)
		Adjustments for tax positions related to acquired entities			―		1,687		(3,195)
		Cash settlements			(6,553)		(11,806)		(9,406)
		Reductions from lapses in statutes of limitations			(7,099)		(1,843)		(1,909)
		Reductions from settlements with taxing authorities			(1,787)		(72,812)		(4,344)
		Foreign exchange rate adjustment			(3,132)		(8,073)		414
		Ending balance		$	149,898	$	154,648	$	229,684
		Unrecognized tax benefits that would affect the
			effective tax rate (if recognized)	$	72,152	$	80,094	$	72,586

For the fiscal year ended August 31, 2015, the reductions from settlements with taxing authorities is primarily related to the closure of a non-U.S. audit which partially disallowed a net operating loss carry forward and future tax amortization.

It is reasonably possible that the August 31, 2016 unrecognized tax benefits could decrease during the next 12 months by $0.9 million from cash payments and by $12.7 million related to the expiration of applicable statutes of limitations. These amounts primarily relate to possible adjustments for transfer pricing.

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 $21.9 million and $20.1 million at August 31, 2016 and 2015, respectively. The Company recognized interest and penalties of approximately $1.8 million, $2.1 million and $1.0 million during the fiscal years ended August 31, 2016, 2015 and 2014, respectively. The Company is no longer subject to U.S. federal income tax examinations for fiscal years before August 31, 2009. 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, 2006, respectively.

The Internal Revenue Service (“IRS”) completed its field examination of the Company’s tax returns for fiscal years 2009 through 2011 and issued a Revenue Agent’s Report on May 27, 2015, which was updated on June 22, 2016, proposing adjustments primarily related to U.S. taxation of certain intercompany transactions. If the IRS ultimately prevails in its positions, the Company’s income tax payment due for the fiscal years 2009 through 2011 would be approximately $28.6 million after utilization of tax loss carry forwards available through fiscal year 2011. Also, the IRS has proposed interest and penalties with respect to fiscal years 2009 through 2011. The IRS may make similar claims in future audits with respect to these types of transactions. At this time, anticipating the amount of any future IRS proposed adjustments, interest, and penalties is not practicable.

The Company disagrees with the proposed adjustments and intends to vigorously contest these matters through the applicable IRS administrative and judicial procedures, as appropriate. As the final resolution of the proposed adjustments remains uncertain, the Company continues to provide for the uncertain tax positions based on the more likely than not standard. While the resolution of the issues may result in tax liabilities, interest and penalties, which are significantly higher than the amounts provided for these matters, management currently believes that the resolution will not have a material adverse effect on the Company’s financial position, results of operations or cash flows. Despite this belief, an unfavorable resolution, particularly if the IRS successfully asserts similar claims for later years, could have a material adverse effect on the Company’s results of operations and financial condition.