10. Income Taxes

The consolidated effective tax rate was 35.0%, 34.5% and 32.9% for fiscals 2013, 2012, and 2011, respectively, and reflects income tax expense for our United States and international operations at their respective statutory rates.

The fiscal 2013 consolidated effective tax rate of 35.0% was favorably affected by the impact of the finalization of tax examinations in March 2013 and Federal tax legislation enacted in January 2013.

The fiscal 2012 consolidated effective tax rate of 34.5% was significantly affected by the closing of our subsidiary in Japan in July 2012 as part of our decision to service our Japan customers in a more cost effective manner. The closing of our Japan location had an insignificant impact on our consolidated income before income taxes in fiscal 2012 because the losses from the write down of this investment recorded in our United States financial statements were offset by related gains recorded in our Japan subsidiary financial statements (excluding approximately $390,000 in severance and other closing costs). However, as a portion of these gains were not taxable in Japan and due to the existence of net operating loss carryforwards (“NOLs”) in Japan, we did not record income tax expense on the gains. Conversely, we recorded an income tax benefit in the United States on the investment losses as we are able to claim a worthless stock tax deduction on our United States tax return, thereby reducing our consolidated income tax expense by approximately $1,000,000 in our fourth quarter of fiscal 2012, which increased both basic and diluted earnings per share by approximately $0.02. Excluding the favorable tax impact of this event, our consolidated effective tax rate for fiscal 2012 would have been 36.6%.

The lower consolidated effective tax rate of 32.9% in fiscal 2011 was principally due to the impact of various Federal tax legislation changes in fiscal 2011, the use of foreign tax credits relating to foreign repatriations and the geographic mix of pre-tax income.

The provision for income taxes consists of the following:

	Year Ended July 31,
	2013					2012					2011
	Current		Deferred			Current		Deferred			Current		Deferred

United States:
Federal	$	18,122,000	$	(351,000	)	$	13,593,000	$	390,000		$	9,651,000	$	(1,538,000	)
State	3,010,000		223,000			2,144,000		78,000			1,595,000		(124,000		)
Canada	221,000		(174,000		)	324,000		(85,000		)	455,000		(143,000		)
Singapore	130,000		10,000			101,000		(13,000		)	138,000		(1,000		)
Netherlands	—		(76,000		)	—		—			—		—
Japan	—		—			—		—			4,000		—
Total	$	21,483,000	$	(368,000	)	$	16,162,000	$	370,000		$	11,843,000	$	(1,806,000	)

The geographic components of income before income taxes are as follows:

	Year Ended July 31,
	2013			2012		2011

United States	$	57,973,000		$	44,120,000	$	27,772,000
Canada	(5,000		)	531,000		1,532,000
Singapore	1,038,000			713,000		796,000
Netherlands	1,344,000			152,000		143,000
Japan	4,000			2,353,000		219,000
Total	$	60,354,000		$	47,869,000	$	30,462,000

The effective tax rate differs from the United States statutory tax rate of 35.0% in fiscals 2013, 2012 and 2011 due to the following:

	Year Ended July 31,
	2013			2012			2011

Expected statutory tax	$	21,124,000		$	16,754,000		$	10,662,000
Differential attributable to foreign operations:
Canada	49,000			54,000			(225,000		)
Singapore	(224,000		)	(161,000		)	(142,000		)
Netherlands	(546,000		)	(53,000		)	(50,000		)
Japan	(1,000		)	(824,000		)	(73,000		)
State and local taxes	2,044,000			1,434,000			867,000
Domestic production deduction	(1,265,000		)	(1,009,000		)	(657,000		)
Taxes on foreign dividends	120,000			(72,000		)	(241,000		)
R&E tax credit	(492,000		)	(138,000		)	(346,000		)
Investment impairment	—			175,000			—
Other	306,000			372,000			242,000
Total income tax expense	$	21,115,000		$	16,532,000		$	10,037,000

Deferred income tax assets and liabilities are comprised of the following:

	July 31,
	2013			2012
Current deferred tax assets:
Accrued expenses	$	2,337,000		$	2,158,000
Inventories	1,149,000			1,323,000
Accounts receivable	676,000			429,000
Foreign NOLs	76,000			—
Subtotal	4,238,000			3,910,000
Valuation allowance	(109,000		)	(111,000		)
	$	4,129,000		$	3,799,000
Non-current deferred tax assets:
Other long-term liabilities	$	527,000		$	527,000
Stock-based compensation	2,138,000			1,811,000
Capital investment	175,000			175,000
Foreign tax credit	133,000			85,000
Domestic NOLs	83,000			111,000
Foreign NOLs	—			977,000
Subtotal	3,056,000			3,686,000
Valuation allowance	(199,000		)	(1,164,000		)
	2,857,000			2,522,000
Non-current deferred tax liabilities:
Property and equipment	(6,310,000		)	(6,496,000		)
Intangible assets	(9,840,000		)	(7,214,000		)
Goodwill	(7,893,000		)	(5,551,000		)
Cumulative translation adjustment	—			(3,130,000		)
Tax on unremitted foreign earnings	—			(25,000		)
	(24,043,000		)	(22,416,000		)
Net non-current deferred tax liabilities	$	(21,186,000	)	$	(19,894,000	)

Deferred tax assets and liabilities have been adjusted for changes in statutory tax rates as appropriate. Such changes only have a significant impact in the United States, and to a lesser extent in Canada, where substantially all of our deferred tax items exist. Such deferred tax items existing in the United States reflect a combined U.S. Federal and state effective rate of approximately 37.9% and 37.7% for fiscals 2013 and 2012, respectively.

At July 31, 2013, we had NOLs for domestic tax reporting purposes of $236,000 which originated from the Purity Acquisition and will begin to expire on July 31, 2029. For foreign tax reporting purposes, our NOLs at July 31, 2013 are approximately $314,000 and are from our Netherlands subsidiary. Due to the simultaneous finalization in March 2013 of an IRS examination in the United States and a Dutch tax authority examination in the Netherlands, we believe it is more likely than not that we will utilize our remaining NOLs in the Netherlands. Consequently, we no longer have NOL valuation allowances on our remaining NOLs in the Netherlands. The NOLs in the Netherlands decreased during fiscal 2013 by $3,578,000 due to the utilization of NOLs in the current year and the finalization of the Dutch tax authority examination resulting in the disallowance of certain NOLs. Furthermore, due to the closure of our Japanese subsidiary during fiscal 2012, we no longer have NOLs in Japan.

As of July 31, 2013 and 2012, we have deferred tax assets of $133,000 and $85,000, respectively, related to foreign tax credits that resulted from foreign source income in fiscal 2013 and 2012. As we currently do not expect significant future additional foreign source income, valuation allowances have been established for these foreign tax credits as we currently believe that it is more likely than not that we will not utilize such foreign tax credits. The foreign tax credits decreased during fiscal 2013 by $48,000 due to the utilization of such credits in the current year, partially offset by newly created foreign tax credits relating to one of our Canadian subsidiaries.

We decreased our overall valuation allowances during fiscal 2013 by $967,000 from $1,275,000 at July 31, 2012 to $308,000 at July 31, 2013, primarily due to the decrease in the foreign NOLs as a result of the finalization of the Dutch tax authority examination and the removal of valuation allowances on our remaining foreign NOLs. Such decreases of our overall valuation allowances during fiscal 2013 did not have a significant impact on our consolidated effective tax rate.

We also have a $175,000 valuation allowance relating to our inability to deduct a fiscal 2012 capital loss on our BIOSAFE investment, as more fully explained in Note 21 to the Consolidated Financial Statements.

During fiscal 2013 and fiscal 2012, no dividends were repatriated from our foreign subsidiaries. All of the undistributed earnings of our foreign subsidiaries are considered to be indefinitely reinvested at July 31, 2013. Accordingly, no provision has been made for United States income taxes from repatriation of these earnings and we no longer have a deferred tax liability on our cumulative translation adjustment.

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 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. 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. 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, 2011	$	191,000
Lapse of statute of limitations	(67,000		)
Unrecognized tax benefits on July 31, 2012	124,000
Activity during fiscal 2013	—
Unrecognized tax benefits on July 31, 2013	$	124,000

Generally, the Company is no longer subject to federal, state or foreign income tax examinations for fiscal years ended prior to July 31, 2005. The Company concluded an audit by the Internal Revenue Service for fiscal year 2011 in March 2013.

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 Consolidated Financial Statements. However, such amounts have been relatively insignificant due to the amount of our unrecognized tax benefits relating to uncertain tax positions.