Note 13 – Income Taxes

Income before income taxes for the fiscal years ended June 30, 2013, 2012 and 2011 were as follows:


	Year Ended June 30,
	2013		2012		2011
Domestic income (loss)	$	110,136	$	63,411	$	(14,410	)
Foreign income		64,134		197,742		174,630

Income before income taxes	$	174,270	$	261,153	$	160,220

Income tax expense (benefit), net for the fiscal years ended June 30, 2013, 2012 and 2011 consisted of the following:


	Year Ended June 30,
	2013			2012			2011
Current:
Federal	$	6,416		$	1,679		$	5,411
State		2,315			1,061			1,028
Foreign		15,415			28,178			26,791

Current income tax expense, net		24,146			30,918			33,230
Deferred:
Federal		23,186			(105,823	)		(10,022	)
State		(11,703	)		(8,553	)		(255	)
Foreign		(3,900	)		15,070			1,351

Deferred income tax expense (benefit), net		7,583			(99,306	)		(8,926	)

Income tax expense (benefit), net	$	31,729		$	(68,388	)	$	24,304

Cash paid for Federal, state and foreign income taxes were $24.3 million, $24.3 million and $9.6 million during the fiscal years ended June 30, 2013, 2012 and 2011, respectively.

The tax provisions and analysis of effective income tax rates for the fiscal years ended June 30, 2013, 2012 and 2011 consisted of the following:


	Year Ended June 30,
	2013			2012			2011
Provision for Federal income taxes before credits at statutory rate	$	60,995		$	91,404		$	56,077
State income taxes		986			2,124			623
Difference between Federal statutory rate and foreign effective rate		(33,209	)		(22,240	)		(16,688	)
Expenses not deductible for tax purposes and other		4,000			12,444			1,703
Tax benefit from U.S. production activities		(3,879	)		(3,704	)		(1,581	)
Change in valuation allowance		2,874			(124,211	)		166
Change in uncertain tax positions		5,035			(1,937	)		7,206
Deferred tax true-up		0			0			(3,703	)
Difference between Federal and financial tax accounting for equity compensation		2,053			896			494
Federal income tax credits		(7,592	)		(22,144	)		(18,024	)
Other		466			(1,020	)		(1,969	)

Income tax expense (benefit), net	$	31,729		$	(68,388	)	$	24,304

Deferred taxes are recorded based upon differences between the financial statement basis and tax basis of assets and liabilities and available tax loss and credit carryforwards. At June 30, 2013 and 2012, deferred taxes consisted of the following:


	June 30,
Assets/(Liabilities)	2013			2012⁽¹⁾
Federal and state tax credits	$	112,937		$	163,029
Deferred interest and loss carryforwards		77,522			58,507
Inventory costing differences		10,076			9,945
Capitalized research and development		106,935			107,204
Fixed assets		9,261			6,270
Amortization of share-based compensation		15,440			21,459
Pension liability and other		42,795			43,943
Reserves and other		35,814			25,048

Deferred tax assets, gross		410,780			435,405
Less valuation allowance		(63,947	)		(60,554	)

Deferred tax assets, net of valuation allowance		346,833			374,851
Intangible assets		(6,843	)		(181	)
Financial instruments		(2,965	)		(13,117	)

Deferred tax liability, gross		(9,808	)		(13,298	)

Net deferred tax asset	$	337,025		$	361,553

⁽¹⁾	Amounts have been revised from the prior year to reflect the gross deferred tax assets for certain loss carryforwards that previously were reported net of valuation allowance and other minor reclassifications.

The above amounts are classified as current or long-term in the Consolidated Balance Sheets in accordance with the asset or liability to which they relate or, when applicable, based on the expected timing of the reversal. The net current deferred tax assets of $91.0 million and $56.0 million are recorded in Other current assets in the Consolidated Balance Sheets at June 30, 2013 and 2012, respectively. The net current deferred tax liabilities of $1.9 million and $2.8 million are recorded in Other current liabilities in the Consolidated Balance Sheets at June 30, 2013 and 2012, respectively. A net non-current deferred tax liability of $12.8 million and $0.4 million is recorded in Other non-current liabilities in the Consolidated Balance Sheets at June 30, 2013 and 2012, respectively.

The deferred tax assets for the respective periods were assessed for recoverability and, where applicable, a valuation allowance was recorded to reduce the total deferred tax asset to an amount that will, more likely than not, be realized in the future. The net change in the total valuation allowance for the fiscal year ended June 30, 2013 was an increase of $ 3.4 million. At June 30, 2013, the valuation allowance is comprised of $18.8 million recorded against deferred tax assets for foreign deferred interest; $7.2 million recorded against state deferred tax assets and $37.9 million recorded against foreign loss carryforwards. At June 30, 2012, the valuation allowance is comprised of $8.6 million recorded against deferred tax assets for U.S. foreign tax credits; $14.3 million recorded against state deferred tax assets and $37.7 million recorded against foreign loss carryforwards.

In assessing the recoverability of deferred tax assets, we regularly consider whether some portion or all of the deferred tax assets will not be realized based on the recognition threshold and measurement of a tax position. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income, tax planning strategies and, if applicable, the expiration of loss carryforwards and credits in making this assessment.

During fiscal year 2013, we reported continued strength in the U.S. resulting in a decrease in the valuation allowance in the U.S. of $15.8 million and a weakness in Europe resulting in a net increase in the valuation allowance in Europe of $19.0 million. As a result of such earnings trends and based upon our projections for future taxable income of the proper character over the periods in which the deferred tax assets are recoverable, we believe that it is more likely than not that we will realize the benefits of the net deferred tax assets of $337.0 million at June 30, 2013. During fiscal year 2013, we recognized a non-cash tax expense of $2.9 million related to a net change in our deferred tax valuation allowances on certain of our net deferred tax assets. We have reflected this non-cash tax charge in the tax provision which has decreased net income for fiscal year 2013. If future operating and business conditions were to differ significantly, we would reassess the ability to realize the net deferred tax assets. If it were to become more likely than not that we would not be able to realize the deferred tax assets, then all or a portion of the valuation allowance may need to be re-established, which would result in a charge to tax expense.

Although realization is not assured, we have concluded that it is more likely than not that the deferred tax assets for which a valuation allowance was determined to be unnecessary, will be realized in the ordinary course of operations based on the available positive and negative evidence including the utilization of taxable temporary differences, projected income from operations and tax planning strategies that could be implemented, if necessary, to prevent a carryforward from expiring. The amount of the net deferred tax assets considered realizable, however, could be reduced in the future if projected income is lower than estimated, or if there are differences in the timing or amount of future reversals of existing taxable or deductible temporary differences.

As of June 30, 2013, the deferred tax assets for tax credit carryforwards are comprised of U.S. foreign tax credits in the amount of $54.7 million with an expiration period between 2016 through 2023; Alternative minimum tax credits of $1.5 million with no expiration and U.S. Federal and state research and experimentation credits in the amount of $42.0 million and $14.7 million, respectively. The U.S. Federal research and experimentation credits expire between 2025 through 2033. Of the state research and experimentation credits, $4.6 million expire between 2014 through 2027 and $9.9 million have no expiration period.

As of June 30, 2013, the deferred tax asset for deferred interest and loss carryforwards are comprised of foreign deferred interest carryforwards of $22.0 million with no expiration period; foreign net operating loss carryforward of $55.3 million with no expiration period and U.S. Federal and state net operating loss carryforwards of $0.2 million with an expiration period of 2014 through 2031.

As of June 30, 2013, we have approximately $716.5 million of unremitted foreign earnings. U.S. deferred taxes have not been provided on all but $0.4 million of these earnings because they are intended to be permanently reinvested. Such earnings would be subject to U.S. taxation if repatriated to the U.S. The determination of the amount of unrecognized deferred tax liability associated with the permanently reinvested cumulative undistributed earnings is not practicable.

Our operations are subject to ongoing tax examinations in various jurisdictions. Significant judgment is required in determining our annual tax expense and in evaluating our tax positions. Accordingly, we have established reserves to remove some or all of the tax benefit of any of our tax positions at the time we determine that the positions become uncertain based upon one of the following: (1) the tax position is not more likely than not to be sustained, (2) the tax position is more likely than not to be sustained, but for a lesser amount, or (3) the tax position is more likely than not to be sustained, but not in the financial period in which the tax position was originally taken. For purposes of evaluating whether or not a tax position is uncertain, (1) we presume the tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information, (2) the technical merits of a tax position are derived from authorities such as legislation and statutes, regulations, rulings and case law, and (3) each tax position is evaluated without consideration of the possibility of offset or aggregation with other tax positions taken. We adjust these reserves, including an impact on the related interest and penalties, in light of changing facts and circumstances, such as the progress of a tax audit.

Changes in the total amount of gross unrecognized tax benefits, including penalties, are as follows:


	2013			2012
Balance, beginning of year	$	34,200		$	32,266
Increases based on tax positions related to the current year		2,485			3,434
Increases identified during the current year related to prior years		1,884			410
Reclassification		(772	)		0
Decreases related to settlement with taxing authorities		(1,687	)		0
Reductions to unrecognized benefits as a result of a lapse of the applicable statute of limitations		(430	)		(45	)
Foreign currency translation		(474	)		(1,865	)

Balance, end of year	$	35,206		$	34,200

The unrecognized tax benefits at June 30, 2013 are permanent in nature and, if recognized, would reduce our effective tax rate. During fiscal year ended June 30, 2013, we settled an uncertain tax provision that resulted in a $1.7 million reduction in our tax reserves related to share based compensation in Germany. The reduction in our tax reserves for this uncertain tax position did not impact our effective tax rate. We periodically reevaluate the recognition and measurement threshold of our uncertain tax positions based on new or additional evidence such as tax authority administrative pronouncements, rulings and court decisions. The ultimate settlement however, may be materially different from the amount accrued. Our significant jurisdictions are Germany, Brazil and the U.S. The tax years currently under examination by the German revenue authorities are fiscal years 2005 through 2010. Brazil is not currently under examination. The tax years currently under examination by the Internal Revenue Service (“IRS”) are fiscal years 2006 and 2007. We have received some proposed changes by the IRS and although the final resolution of the proposed adjustments is uncertain, we believe that the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial position, results of operations and cash flows. While we expect the amount of unrecognized tax benefits to change, we are unable to quantify the change at this time.

Of our unrecognized tax benefits, $18.4 million is included in Other non-current liabilities; $4.1 million is included in Income taxes payable and $12.7 million has reduced our Deferred tax assets, long-term, in our Consolidated Balance Sheet at June 30, 2013.

We recognize interest related to unrecognized tax benefits in Income tax expense (benefit) in our Consolidated Statements of Income. As of June 30, 2013, the amount accrued for interest is $2.1 million.