Income Taxes

3 Months Ended

Oct. 31, 2011

Income Taxes

Income Taxes

Note 12.                 Income Taxes

The consolidated effective tax rate was 36.4% and 34.5% for the three months ended October 31, 2011 and 2010, respectively. The increase in the consolidated effective tax rate was principally due to the geographic mix of pre-tax income, as described below.

The majority of our income before income taxes was generated from our United States operations, which had an overall effective tax rate of 36.6% and 36.7% for the three months ended October 31, 2011 and 2010, respectively. Approximately 98% of our income before income taxes was generated from our United States operations compared with approximately 85% of our income before income taxes in the prior year period.

Approximately 2% of our income before income taxes was generated from our Canadian operations for the three months ended October 31, 2011 compared with approximately 9% of our income before income taxes in the prior year period. Our Canadian operations had an overall effective tax rate of 27.1% and 29.0% for the three months ended October 31, 2011 and 2010, respectively. The low overall effective tax rates for both periods were due to the low corporate tax structure in Canada.

For the three months ended October 31, 2011, our operations in Singapore, a country with a low corporate tax structure, generated a small loss compared with a profit that was approximately 3.4% of our income before income taxes for the three months ended October 31, 2010. The overall effective tax rate for our Singapore operation was 16.4% for the three months ended October 31, 2010.

Our subsidiary in Japan generated a small profit for the three months ended October 31, 2011 compared with a profit that was approximately 1.9% of our income before income taxes for the three months ended October 31, 2010. Due to the existence of net operating loss carryforwards, we recorded no income taxes for the three months ended October 31, 2011 and 2010, which had a more favorable impact on our consolidated effective tax rate in the prior year due to the larger profit generated by our Japan subsidiary for the three months ended October 31, 2010.

The results of operations for our Netherlands subsidiary did not have a significant impact on our overall effective tax rate for the three months ended October 31, 2011 and 2010 due to the size of income before income taxes generated from this operation.

We record liabilities for an unrecognized tax benefit when a tax benefit for an uncertain tax position is taken or expected to be taken on a tax return, but is not recognized in our Condensed Consolidated Financial Statements because it does not meet the more-likely-than-not recognition threshold that the uncertain tax position would be sustained upon examination by the applicable taxing authority. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon settlement with the tax authorities. Some of our unrecognized tax benefits originated from acquisitions. Any adjustments upon resolution of income tax uncertainties are recognized in our results of operations. However, if our unrecognized tax benefits are recognized in our financial statements in future periods, there would not be a significant impact to our overall effective tax rate due to the size of the unrecognized tax benefits in relation to our income before income taxes. Except for decreases due to the lapse of applicable statutes of limitation, we do not expect such unrecognized tax benefits to significantly decrease or increase in the next twelve months.

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

	Unrecognized
	Tax Benefits
Unrecognized tax benefits on July 31, 2010	$	208,000
Increase for current period tax position	124,000
Lapse of statute of limitations	(141,000		)
Unrecognized tax benefits on July 31, 2011	191,000
Activity during the three months ended October 31, 2011	—
Unrecognized tax benefits on October 31, 2011	$	191,000

Generally, the Company is no longer subject to federal, state or foreign income tax examinations for fiscal years ended prior to July 31, 2005.

Our policy is to record potential interest and penalties related to income tax positions in interest expense and general and administrative expense, respectively, in our Condensed Consolidated Financial Statements. However, such amounts have been relatively insignificant due to the amount of our unrecognized tax benefits relating to uncertain tax positions.