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INCOME TAXES
12 Months Ended
Aug. 31, 2011
INCOME TAXES [Abstract]  
INCOME TAXES
NOTE 11 - INCOME TAXES
 
Income from continuing operations before provision for income taxes and loss of unconsolidated affiliates includes the following components (in thousands):

 
Years Ended August 31,
 
 
 2011
 
2010
   
2009
 
United States
$
24,259 
 
$
17,390
   
$
4,539
 
Foreign
$
65,097
 
$
54,850
   
$
51,163
 
Income from continuing operations before provision for income taxes and loss of unconsolidated affiliates
$
89,356
 
$
72,240
   
$
55,702
 

Significant components of the income tax provision are as follows (in thousands):

 
Years Ended August 31,
 
 
 2011
 
2010
   
2009
 
Current:
           
U.S.
$
4,905 
 
$
3,540
   
$
(659
)
Foreign
 
21,170 
   
15,054
     
14,650
 
Total
$
26,075 
 
$
18,594
   
 $
13,991
 
Deferred:
                   
U.S.
$
375
 
$
2,973
   
$
1,001
 
Foreign
 
146 
   
1,870
     
951
 
Valuation allowance charge (release)
 
872 
   
(650
)
   
(2,874
)
Total
$
1,393
 
$
4,193
   
$
(922
)
Provision for income taxes
$
27,468
 
$
22,787
   
$
13,069
 

 
As of August 31, 2011, the Company has elected to present the reconciliation of income tax on a percentage basis as compared to a whole dollar basis.  The reconciliation of income tax computed at the Federal statutory tax rate to the provision for income taxes is as follows (in percentages):

 
Years Ended August 31,
 
 
2011
   
2010
   
2009
 
Federal tax provision at statutory rates
35.00
%
 
34.00
%
   
34.00
%
State taxes, net of federal benefit
0.84
   
        0.47
     
0.11
 
Differences in foreign tax rates
(3.74
 
(3.39
)
   
(7.03
)
Permanent items and other adjustments
(2.34
)
 
       1.36
 
   
1.54
 
Increase (decrease) in Foreign valuation allowance
0.98
   
        (0.90
)
   
(5.16
)
Provision for income taxes
30.74
%
 
 31.54
%
   
23.46
%
 
Significant components of the Company's deferred tax assets as of August 31, 2011 and 2010 are shown below (in thousands):
 

 
August 31,
 
 
 2011
   
2010
     
2009
 
Deferred tax assets:
             
U.S. net operating loss carryforward
$
8,953
   
$
9,688
   
$
10,437
 
U.S. capital loss carryforward
 
-
     
4,318
     
4,318
 
U.S. timing differences and AMT credits
 
294
 
   
1,787
 
   
2,392
 
Deferred compensation
 
683
     
921
     
1,258
 
Foreign tax credits
 
3,569
     
4,944
     
5,859
 
Foreign deferred taxes
 
15,421
     
14,264
     
15,414
 
Total deferred tax assets
 
28,920
     
35,922
     
39,678
 
U.S. valuation allowance
 
(8
   
(8,350
)
   
(8,350
)
Foreign valuation allowance
 
(7,661
   
(7,296
)
   
(7,772
)
Net deferred tax assets
$
21,251
   
$
20,276
   
$
23,556
 

As of August 31, 2011 and 2010, the Company had deferred tax liabilities of $2.4 million and $1.6 million, respectively, arising from timing differences in certain subsidiaries.

During fiscal year 2011, the Company incurred current tax expense of $26.1 million and recognized a net deferred tax expense of $1.4 million, resulting in a net tax expense of $27.5 million.  During fiscal year 2010, the Company incurred current tax expense of $18.6 million and recognized a net deferred tax expense of $4.2 million, resulting in net tax expense of $22.8 million.  The effective tax rate for fiscal year 2011 is 30.74%, as compared to the effective tax rate for fiscal year 2010 of 31.54%.  For fiscal year 2011, the decrease in the effective tax rate is primarily attributable to a $3.1 million decrease in tax expense due to the correction of an error identified in the Company's reconciliation of net deferred tax assets related to net operating and capital loss carryforwards to its tax returns (see Note 1 - Company Overview and Basis of Presentation). This decrease was offset by the following: (i) an increase in U.S. statutory tax rate from 34% to 35%; (ii) a $516,000 undistributed profits tax in Panama for accumulated retained earnings that the Company is not planning to repatriate to the US; (iii) a $581,000 income tax accrual for uncertain tax positions; and (iv) a charge to taxes due to a taxable loss incurred in the Company's new Colombia entity for which it did not recognize a tax benefit. A full valuation allowance was recorded against the future tax benefit of losses generated by Colombia operations which started during fiscal year 2010. This valuation allowance was necessary because the Colombia operations have not established an earnings history to support recording a tax benefit.
 
For fiscal year 2011, management concluded that a valuation allowance continues to be necessary for certain U.S. and foreign deferred tax asset balances, primarily because of the existence of significant negative objective evidence, such as the fact that certain subsidiaries are in a cumulative loss position for the past three years, and the determination that certain net operating loss carryforward periods are not sufficient to realize the related deferred tax assets. The Company factored into its analysis the inherent risk of forecasting revenue and expenses over an extended period of time and also considered the potential risks associated with its business. There were no reversal of previously recorded foreign valuation allowances during fiscal years 2011 and 2010. Accordingly, the Company had net foreign deferred tax assets of $7.8 million and $7.0 million as of August 31, 2011 and 2010, respectively.
 
The Company has federal and state tax net operating loss carryforwards, or NOLs, at August 31, 2011 of approximately $29.8 million and $4.6 million, respectively. The federal and state tax loss carryforwards generally expire during periods ranging from 2015 through 2025, unless previously utilized.  Generally for U.S. federal and U.S. Virgin Islands tax reporting purposes, the statute of limitations is three years from the date of filing of the income tax return.  If and to the extent the tax year resulted in a taxable loss, the statute is extended to three years from the filing date of the income tax return in which the carryforward tax loss was used to offset taxable income in the carryforward year.   In calculating the tax provision and assessing the likelihood that the Company will be able to utilize the deferred tax assets, the Company considered and weighed all of the evidence, both positive and negative, and both objective and subjective. The Company factored in the inherent risk of forecasting revenue and expenses over an extended period of time and considered the potential risks associated with its business. Using the Company's U.S. income from continuing operations and projections of future taxable income in the U.S., the Company was able to determine that there was sufficient positive evidence to support the conclusion that it was more likely than not that the Company would be able to realize substantially all of its U.S. NOLs by generating taxable income during the carryforward period. However, if the Company does not achieve its projections of future taxable income in the U.S., the Company could be required to take a charge to earnings related to the recoverability of these deferred tax assets.

The Company has determined that due to a deemed change of ownership (as defined in Section 382 of the Internal Revenue Code) in October 2004, there will be annual limitations in the amount of U.S. profits that may be offset by NOLs. The NOLs generated prior to the deemed ownership change date, as well as a significant portion of the losses generated as a result of the PSMT Philippines disposal in August 2005, will be limited on an annual basis.   This annual limitation is approximately $3.5 million per year.  The Company does not believe this will impact the recoverability of these NOLs.
 
As of August 31, 2011, the Company also has foreign tax credits that expire from 2015 through 2020 of $3.6 million.  Due to their shorter recovery period and limitations applicable under section 383 of the Internal Revenue code regarding changes of ownership, the Company had, as of August 31, 2010, valuation allowances of $1.0 million on U.S. foreign tax credit carryforwards generated before the date of the deemed ownership change. During fiscal year August 31, 2011, the Company elected to convert $900,000 of these foreign tax credits into net operating losses.
 
The Company's capital loss carryforwards resulting from the disposal of PSMT Philippines and Mexico expired during fiscal year 2011. As such, the capital loss carryforward deferred tax assets and related valuation allowance recorded against them were reversed during the fiscal year.
 
The Company does not provide for income taxes which would be payable if undistributed earnings of its foreign subsidiaries were remitted, because the Company considers these earnings to be permanently reinvested. As of August 31, 2011 and 2010, the undistributed earnings of these foreign subsidiaries are approximately $144.7 million and $96.9 million, respectively. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes and withholding taxes payable to the foreign countries, but would also be able to offset unrecognized foreign tax credits.  Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable because of the complexities associated with its hypothetical calculation.

The Company accrues for the estimated additional amount of taxes for uncertain income tax positions if the likelihood of sustaining the tax position does not meet the more likely than not standard for recognition of tax benefits.

 
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

 
August 31,
 
 
 2011
   
2010
 
Balance at beginning of fiscal year
$
13,615
   
$
13,851
 
Additions based on tax positions related to the current year
 
1,130
     
429
 
Reductions for tax positions of prior years
 
-
     
(166
)
Settlements
 
(643
   
(21
)
Expiration of the statute of limitations for the assessment of taxes
 
(574
   
(478
)
Balance at end of fiscal year
$
13,528
   
$
13,615
 


As of August 31, 2011, the liability for income taxes associated with uncertain tax benefits was $13.5 million and can be reduced by $11.6 million of tax benefits associated with state income taxes and other timing adjustments which are recorded as deferred income taxes pursuant to ASC 740-10. The net amount of $1.9 million, if recognized, would favorably affect the Company's financial statements and favorably affect the Company's effective income tax rate.
 
The Company expects changes in the amount of unrecognized tax benefits in the next 12 months as the result of a lapse in various statutes of limitations. The lapse of statutes of limitations in the 12-month period ending August 31, 2012 is expected to result in a reduction to long-term income taxes payable totaling $1.5 million.

The Company recognizes interest and/or penalties related to income tax matters in income tax expense. As of August 31, 2011 and 2010, the Company had accrued $1.3 million and $1.5 million, respectively, (before income tax benefit) for the payment of interest and penalties.
 
The Company has various appeals pending before tax courts in its subsidiaries' jurisdictions.  Any possible settlement could increase or decrease earnings but is not expected to be significant. Audit outcomes and the timing of audit settlements are subject to significant uncertainty.

The Company or one of its subsidiaries files income tax returns in the US federal jurisdiction and various state and foreign jurisdictions. The Company is generally no longer subject to income tax examinations by tax authorities in its major jurisdictions except for the fiscal years subject to audit as set forth in the table below:

Tax Jurisdiction
Fiscal Years Subject to Audit
U.S. federal
1997 through 2001 and 2003 through 2011
California (U.S.) (state return)
2004 through 2011
Florida(U.S.) (state return)
2005 through 2011
Aruba
2002 to the present
Barbados
2005 to the present
Costa Rica
2008 to the present
Colombia 2009 to the present
Dominican Republic
2006 to the present
El Salvador
2007 to the present
Guatemala
2008 and 2010
Honduras
2006 to the present
Jamaica
2005 to the present
Mexico
2006 to the present
Nicaragua
2007 to the present
Panama
2008 to the present
Trinidad
2004 to the present
U.S. Virgin Islands
2001 to the present

Generally for U.S. federal and U.S. Virgin Islands tax reporting purposes, the statute of limitations is three years from the date of filing of the income tax return.  If and to the extent the tax year resulted in a taxable loss, the statute is extended to three years from the filing date of the income tax return in which the carryforward tax loss was used to offset taxable income in the carryforward year.  Given the historical losses in these jurisdictions and the Section 382 change in control limitations on the use of the tax loss carryforwards, there is uncertainty and significant variation as to when a tax year is no longer subject to audit.
 
Cash amounts paid during fiscal year 2011, 2010 and 2009 for income taxes were $22.4 million, $19.3 million, and $13.0 million, respectively.