Income Taxes

The following table summarizes the provision/(benefit) for U.S. federal, state and foreign taxes on income from continuing operations.



	2013			2012			2011
	(In thousands)
Current:
U.S. federal	$	126,878		$	112,064		$	41,673
State	14,622			12,326			14,992
Foreign	187,363			216,076			161,355
	328,863			340,466			218,020
Deferred:
U.S. federal	(13,589		)	(16,884		)	122,757
State	894			4,124			(4,402		)
Foreign	(74,570		)	(82,740		)	34,442
	(87,265		)	(95,500		)	152,797
Provision for income taxes	$	241,598		$	244,966		$	370,817

Tax benefits related to stock options and other equity instruments recorded directly to additional capital totaled $20.8 million in Fiscal 2013, $16.8 million in Fiscal 2012 and $21.4 million in Fiscal 2011.

The components of income from continuing operations before income taxes consist of the following:



	2013		2012		2011
	(In thousands)
Domestic	$	378,283	$	315,741	$	470,646
Foreign	965,360		920,348		945,676
From continuing operations	$	1,343,643	$	1,236,089	$	1,416,322

The differences between the U.S. federal statutory tax rate and the Company’s consolidated effective tax rate on continuing operations are as follows:



	2013		2012		2011
U.S. federal statutory tax rate	35.0	%	35.0	%	35.0	%
Tax on income of foreign subsidiaries	(7.7	)	(8.7	)	(5.6	)
Changes in valuation allowances	0.9		1.5		(0.8	)
Earnings repatriation	0.9		2.0		2.9
Tax free interest	(4.7	)	(5.4	)	(4.1	)
Effects of revaluation of tax basis of foreign assets	(6.2	)	(3.2	)	(1.6	)
Audit settlements and changes in uncertain tax positions	(0.3	)	(2.0	)	—
Other	0.1		0.6		0.4
Effective tax rate	18.0	%	19.8	%	26.2	%

The decrease in the effective tax rate is primarily the result of increased benefits from the revaluation of the tax basis of certain foreign assets, which includes our Fiscal 2013 reorganization, and reduced charges for the repatriation of current year foreign earnings. See below for further explanation of the revaluation. These amounts were partially offset by lower current year benefits from tax free interest and tax on income of foreign subsidiaries. The prior year also contained a benefit from the resolution of a foreign tax case. Both periods contained a benefit of approximately $15 million from the reversal of an uncertain tax position liability due to the expiration of the statute of limitations in a foreign tax jurisdiction as well as benefits in each year related to 200 basis point statutory tax rate reductions in the United Kingdom. The decrease in the effective tax rate in Fiscal 2012 was primarily the result of increased benefits from the revaluation of the tax basis of foreign assets, the reversal of an uncertain tax position liability due to the expiration of the statute of limitations in a foreign jurisdiction, the beneficial resolution of a foreign tax case, and lower tax on the income of foreign subsidiaries primarily resulting from a statutory tax rate reduction in the U.K. These benefits were partially offset by changes in valuation allowances. The effective tax rate in Fiscal 2011 was impacted by lower benefits from foreign tax planning and higher costs for repatriation of earnings, partially offset by a net benefit related to changes in valuation allowances.

During the second quarter of Fiscal 2013, the Company completed a tax-free reorganization in a foreign jurisdiction which resulted in an increase in the tax basis of both fixed and intangible assets. The increased tax basis resulted in a $63.0 million discrete tax benefit fully recognized in the second quarter and is expected to provide cash flow benefits of approximately $91 million over the next 10 years as a result of the tax deductions of the assets over their amortization periods.

During the first quarter of Fiscal 2013, a foreign subsidiary of the Company exercised a tax option under local law to revalue certain of its intangible assets, increasing the local tax basis by $82.1 million. This revaluation resulted in a reduction of tax expense in Fiscal 2013, fully recognized in the first quarter, of $12.9 million, reflecting the deferred tax benefit from the higher tax basis partially offset by the tax liability arising from this revaluation of $13.1 million.

During the second quarter of Fiscal 2012, a foreign subsidiary of the Company exercised a tax option under local law to revalue certain of its intangible assets, increasing the local tax basis by approximately $220.2 million. This revaluation resulted in a reduction in Fiscal 2012 tax expense, fully recognized in the second quarter of Fiscal 2012, of $34.9 million reflecting the deferred tax benefit from the higher tax basis partially offset by the current tax liability arising from this revaluation of $34.8 million.

The tax benefit from the higher basis amortization of both revaluations above will result in a reduction in cash taxes over the 20 year tax amortization period of approximately $95 million. Also, as a result of these taxable revaluations, the subsidiary made tax payments of $17.9 million and $10.4 million during the second quarters Fiscal 2013 and Fiscal 2012, respectively, and is expected to make additional payments of approximately $16 million and $4 million during Fiscals 2014 and 2015, respectively.

The following table and note summarize deferred tax (assets) and deferred tax liabilities as of April 28, 2013 and April 29, 2012.



	2013			2012
	(In thousands)
Depreciation/amortization	$	833,008		$	910,987
Benefit plans	41,354			59,647
Deferred income	97,482			96,472
Financing costs	117,161			117,670
Other	46,510			48,371
Deferred tax liabilities	1,135,515			1,233,147
Operating loss carryforwards	(90,790		)	(141,358		)
Benefit plans	(211,658		)	(195,697		)
Depreciation/amortization	(158,194		)	(147,745		)
Tax credit carryforwards	(111,431		)	(81,703		)
Deferred income	(18,596		)	(20,286		)
Other	(97,894		)	(96,502		)
Deferred tax assets	(688,563		)	(683,291		)
Valuation allowance	46,069			90,553
Net deferred tax liabilities	$	493,021		$	640,409

The Company also has foreign deferred tax assets and valuation allowances of $117.9 million as of April 28, 2013, each related to statutory increases in the capital tax bases of certain internally generated intangible assets for which the probability of realization is remote. The table above excludes foreign deferred tax assets of $55.1 million, deferred tax liabilities of $5.2 million and a valuation allowance of $54.3 million related to a business classified as held for sale as of April 28, 2013.

The Company records valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. When assessing the need for valuation allowances, the Company considers future taxable income and ongoing prudent and feasible tax planning strategies. Should a change in circumstances lead to a change in judgment about the realizability of deferred tax assets in future years, the Company would adjust related valuation allowances in the period that the change in circumstances occurs, along with a corresponding increase or charge to income.

The resolution of tax reserves and changes in valuation allowances could be material to the Company’s results of operations for any period, but is not expected to be material to the Company’s financial position.

At the end of Fiscal 2013, foreign operating loss carryforwards totaled $309.5 million. Of that amount, $86.6 million expire between 2014 and 2031; the other $222.9 million do not expire. Deferred tax assets of $75.3 million have been recorded for foreign tax credit carryforwards. These credit carryforwards expire between 2020 and 2023. Deferred tax assets of $9.7 million have been recorded for state operating loss carryforwards. These losses expire between 2014 and 2033. Additionally, the Company has incurred losses in a foreign jurisdiction where the realization of a tax benefit is considered remote and, as a result, the Company has no deferred tax asset recognized for such losses.

The net change in the Fiscal 2013 valuation allowance shown above is a decrease of $44.5 million. The decrease was primarily due to the classification of a foreign business as held for sale. The net change in the Fiscal 2012 valuation allowance was an increase of $26.2 million. The increase was primarily due to the recording of additional valuation allowance for foreign loss carryforwards that are not expected to be utilized, partially offset by the release of valuation allowance related to state tax loss and credit carryforwards that are now expected to be utilized. The net change in the Fiscal 2011 valuation allowance was an increase of $1.9 million. The increase was primarily due to the recording of additional valuation allowance for foreign loss carryforwards that are not expected to be utilized prior to their expiration date, partially offset by a reduction in unrealizable net state deferred tax assets.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:



	2013			2012			2011
	(In millions)
Balance at the beginning of the fiscal year	$	52.7		$	70.7		$	57.1
Increases for tax positions of prior years	1.9			5.2			13.5
Decreases for tax positions of prior years	(8.6		)	(18.0		)	(26.0		)
Increases based on tax positions related to the current year	13.9			3.7			10.8
Increases due to business combinations	—			—			26.9
Decreases due to settlements with taxing authorities	(4.1		)	(2.2		)	(5.4		)
Decreases due to lapse of statute of limitations	(10.4		)	(6.7		)	(6.2		)
Balance at the end of the fiscal year	$	45.4		$	52.7		$	70.7

The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $38.3 million and $38.9 million, on April 28, 2013 and April 29, 2012, respectively.

The Company classifies interest and penalties on tax uncertainties as a component of the provision for income taxes. For Fiscal 2013, the total amount of net interest and penalty expense included in the provision for income taxes was a benefit of $4.2 million and $6.3 million, respectively. For Fiscal 2012, the total amount of net interest and penalty expense included in the provision for income taxes was a benefit of $9.5 million and $4.7 million, respectively. For Fiscal 2011, the total amount of net interest and penalty expense included in the provision for income taxes was a benefit of $1.3 million and $0.1 million, respectively. The total amount of interest and penalties accrued as of April 28, 2013 was $8.5 million and $6.9 million, respectively. The corresponding amounts of accrued interest and penalties at April 29, 2012 were $16.0 million and $13.8 million, respectively.

It is reasonably possible that the amount of unrecognized tax benefits will decrease by as much as $16.9 million in the next 12 months primarily due to the expiration of statutes in various foreign jurisdictions along with the progression of state and foreign audits in process.

The provision for income taxes consists of provisions for federal, state and foreign income taxes. The Company operates in an international environment with significant operations in various locations outside the U.S. Accordingly, the consolidated income tax rate is a composite rate reflecting the earnings in various locations and the applicable tax rates. In the normal course of business the Company is subject to examination by taxing authorities throughout the world, including such major jurisdictions as Australia, Canada, Italy, the United Kingdom and the United States. The Company has substantially concluded all national income tax matters for years through Fiscal 2010 for the U.S. and United Kingdom, through Fiscal 2009 for Italy, and through Fiscal 2008 for Australia and Canada.

Undistributed earnings of foreign subsidiaries considered to be indefinitely reinvested or which may be remitted tax free in certain situations, amounted to $5.7 billion at April 28, 2013. The Company has not determined the deferred tax liability associated with these undistributed earnings, as such determination is not practicable. See Note 21 for a discussion of the Merger Agreement consummated on June 7, 2013. The Company's provision for income taxes for the year ended April 28, 2013 does not include any effects of the Merger including the effects of any related changes in plans for the reinvestment of undistributed earnings of foreign subsidiaries.