SHFL entertainment Inc. - 10-K filing on 2012-12-21

Note 12 - Income Taxes

12 Months Ended

Oct. 31, 2012

12. INCOME TAXES

The following is a summary of income before taxes of the United States and foreign operations for the fiscal years ended October 31:

	Year Ended October 31,
	2012		2011		2010
	(In thousands)

US	$	26,336	$	22,885	$	19,060
Foreign		28,124		20,435		12,003
Total		54,460		43,320		31,063

The components of the provision for income taxes from continuing operations were as follows for the years ended October 31:

	Year Ended October 31,
	2012			2011			2010
	(In thousands)
Current:
Federal	$	7,522		$	1,845		$	1,529
State		1,189			729			1,062
Foreign		8,933			3,290			960
		17,644			5,864			3,551
Deferred:
Federal		(1,267	)		3,693			2,304
State		(61	)		(84	)		(84	)
Foreign		(462	)		2,257			2,209
		(1,790	)		5,866			4,429
Total	$	15,854		$	11,730		$	7,980

The provision for income taxes differs from the amount computed using the statutory United States Federal income tax rate as follows for the fiscal years ended October 31:

	Year Ended October 31,
	2012			2011			2010

Federal income tax at the statutory rate		35.0	%		35.0	%		35.0	%
State income taxes, net of federal benefits		0.9	%		1.8	%		2.3	%
Foreign and U.S. tax rate differential		(3.7	%)		(2.7	%)		(2.8	%)
Interest expense		(1.9	%)		(2.5	%)		(3.1	%)
Tax credits		(3.3	%)		(5.0	%)		(5.5	%)
Withholding tax		1.3	%		1.6	%		2.7	%
Change in liability for uncertain tax positions		(0.4	%)		0.2	%		(2.8	%)
Other		1.2	%		(1.3	%)		(0.1	%)
Effective tax rate		29.1	%		27.1	%		25.7	%

Deferred tax assets and liabilities consisted of the following as of October 31:

	Year Ended October 31,
	2012			2011
	(In thousands)
Deferred tax assets:
Inventories	$	1,766		$	2,341
Employee benefits		2,939			2,530
Stock-based compensation		5,201			4,848
Fixed assets		-			1,334
Foreign net operating loss carryforward		4,893			4,990
Intangible assets		3,478			4,371
Other		3,311			2,929
Total gross deferred tax assets		21,588			23,343
Less: valuation allowance		(1,845	)		(1,334	)
Deferred tax assets		19,743			22,009

Deferred tax liabilities:
Intangible assets		7,319			6,720
Fixed assets		2,852			7,053
Other		1,276			1,325
Total gross deferred tax liabilities		11,447			15,098

Net deferred tax assets	$	8,296		$	6,911

As of October 31, 2012 and 2011, we have income tax net operating loss carryforwards related to our international operations of approximately $18.6 million and $19.4, respectively, which have an indefinite life. As of October 31, 2012 and 2011, there were valuation allowances of $1.8 million and $1.3 million, respectively, provided on foreign net operating loss carryforwards and other foreign deferred tax assets, as the Company believes these assets do not meet the “more likely than not” criteria for recognition.

We have not provided United States Federal income tax on $41.5 million of undistributed earnings of our foreign subsidiaries. We intend to permanently reinvest such earnings outside the United States. Upon distribution of these earnings in the form of dividends or capital gains, we would be subject to the United States income tax net of applicable foreign tax credits. In addition, such distributions would be subject to withholding taxes in the various tax jurisdictions. Determination of the amount of unrecognized deferred United States income tax liability is not practicable because of the complexities associated with its hypothetical calculation.

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

	Year Ended October 31,
	2012			2011			2010
	(In thousands)
Balance at beginning of year	$	1,200		$	1,124		$	1,322
Increases related to prior year tax positions		21			37			631
Increases related to current year tax positions		76			103			54
Reductions due to lapse of statutes of limitations		(869	)		(64	)		(883	)
Balance at year end	$	428		$	1,200		$	1,124

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $0.4 million and $0.6 million as of October 31, 2012 and 2011, respectively. No significant increases or decreases in unrecognized tax benefit are expected within the next 12 months.

Our major tax jurisdictions are the United States, Australia, and Austria. In the United States, we are currently under examination for tax years ended October 31, 2010 and 2011. In Australia and Austria, we are subject to examination for years after October 31, 2009 and 2010, respectively. We believe we have adequately reserved for uncertain tax positions; however, there is no assurance that the taxing authorities will not propose adjustments that are different than the Company’s expected outcome and impact the provision for income taxes.

We have a policy of recognizing interest and penalties related to unrecognized tax benefits within the income tax expense line in the consolidated statement of operations and within the related tax liability line in the consolidated balance sheet. For the year ended October 31, 2012, we recognized a benefit of $0.1 million related to interest and penalties in our consolidated statement of operations. For the year ended October 31, 2011, we recognized an expense of $0.04 million related to interest and penalties in our consolidated statement of operations. Our total accrued interest and penalties as of October 31, 2012 and 2011 is $0.0 million and $0.2 million, respectively.

We filed numerous consolidated and separate income tax returns in the United States federal jurisdiction and in many state and foreign jurisdictions. With few exceptions, we are no longer subject to United States federal, state and local, or foreign income tax examinations for years before 2006.