P. Income Taxes

The components of income before income taxes and income tax expense (benefit) were as follows:


	Year Ended June 30,
	2012			2011		2010
Income from continuing operations before income taxes:
United States	$	31,277		$	26,072	$	18,714
Foreign		494			495		(22	)

	$	31,771		$	26,567	$	18,692

Income tax expense (benefit) from continuing operations:
Federal:
Current	$	10,591		$	4,974	$	(356	)
Deferred		(2,582	)		1,992		(8,286	)

	$	8,009		$	6,966	$	(8,642	)
State:
Current	$	1,401		$	855	$	98
Deferred		(335	)		48		(711	)

	$	1,066		$	903	$	(613	)
Foreign:
Current	$	77		$	161	$	(122	)
Deferred		—			30		—

	$	77		$	191	$	(122	)

	$	9,152		$	8,060	$	(9,377	)

The following is the reconciliation between the statutory federal income tax rate and the Company’s effective income tax rate from continuing operations:


	Year Ended June 30,
	2012			2011			2010
Income taxes at federal statutory rates		35.0	%		35.0	%		35.0	%
State income tax, net of federal tax benefit		2.6			2.2			0.5
Research and development credits		(4.2	)		(6.9	)		(5.9	)
Domestic manufacturing deduction		(3.0	)		(2.6	)		—
Deemed repatriation of foreign earnings		—			—			(1.4	)
Equity compensation		1.0			1.6			1.8
IRS audit adjustments		—			—			(1.5	)
Goodwill impairment		—			—			0.4
Change in the fair value of the liability related to the LNX earn-out		(5.4	)		—			—
Acquisition costs		1.3			0.6			—
Valuation allowance		2.2			1.7			(79.8	)
Other		(0.7	)		(1.3	)		0.7

		28.8	%		30.3	%		(50.2	)%

The components of the Company’s net deferred tax assets (liabilities) were as follows:


	June 30,
	2012			2011
Deferred tax assets:
Inventory valuation and receivable allowances	$	4,788		$	4,189
Accrued compensation		1,367			1,424
Equity compensation		6,036			5,565
Federal and state research and development tax credit carryforwards		8,569			8,716
Net operating loss		—			900
Gain on sale-leaseback		2,116			2,556
Other accruals		919			328
Repatriation of foreign earnings		—			76
Other temporary differences		1,333			594

		25,128			24,348
Valuation allowance		(8,682	)		(7,973	)

Total deferred tax assets		16,446			16,375
Deferred tax liabilities:
Deferred revenue		(3,488	)		(4,776	)
Property and equipment depreciation		(3,995	)		(2,452	)
Acquired intangible assets		(8,507	)		(5,346	)

Total deferred tax liabilities		(15,990	)		(12,574	)

Net deferred tax (liabilities) assets	$	456		$	3,801

At June 30, 2012, the Company evaluated the need for a valuation allowance on deferred tax assets. In assessing whether the deferred tax assets are realizable, management considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. 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. The Company continues to conclude that it was “more likely than not”, that most domestic deferred tax assets would be realizable based on the financial performance in fiscal year 2012, projected future taxable income and the reversal of existing deferred tax liabilities.

The Company continues to record a full valuation allowance on Massachusetts research and development (“R&D”) and investment tax credits as of June 30, 2012 as management continues to believe that it is not more likely than not that these deferred tax assets would be realized.

The Company had state research and development credit carryforwards of $12,813, which will expire 2018 through 2027. The Company also had state investment tax credits carryforwards of $124 that will expire in 2015. As of June 30, 2012, the Company also had approximately $399 in foreign operating loss carryforwards.

Upon consideration of changing business conditions and cash position in its foreign subsidiaries, management has determined that it would no longer need to indefinitely reinvest the earnings of certain foreign subsidiaries. Therefore, the Company has accrued deferred taxes in association with the $1,200 in undistributed earnings and profits.

The Company files income tax returns in all jurisdictions in which it operates. The Company has established reserves to provide for additional income taxes that may be due in future years as these previously filed tax returns are audited. These reserves have been established based upon management’s assessment as to the potential exposures. All tax reserves are analyzed quarterly and adjustments are made as events occur and warrant modification.

The changes in the Company’s reserves for unrecognized income tax benefits are summarized as follows:


	Year Ended June 30,
	2012			2011
Unrecognized tax benefits, beginning of period	$	1,831		$	1,856
Increases for previously recognized positions		716			27
Settlements of previously recognized positions		—			(59	)
Decreases for previously recognized positions		(84	)		(229	)
Increases for currently recognized positions		179			236

Unrecognized tax benefits, end of period	$	2,642		$	1,831

The $2,642 of unrecognized tax benefits as of June 30, 2012, if released, would reduce income tax expense.

The Company’s major tax jurisdiction is the U.S. and the open tax years are 2009 through 2011.

The Company expects that there will not be any material changes in its reserves for unrecognized tax benefits within the next 12 months. Currently there are no significant tax audits underway.