16. Income taxes:

A reconciliation of income taxes at the United States statutory rate to the effective tax rate follows:


	Year Ended July 31,
	2012			2011			2010
U.S. Federal statutory tax rate		35	%		35	%		35	%
State income taxes, net of federal tax benefit		-1	%		-2	%		-1	%
Domestic production benefit		-2	%		-2	%		-2	%
General business credit		-1	%		-10	%		-2	%
Valuation allowance		1	%		0	%		3	%
Effect of international operations		-3	%		-3	%		-4	%
(Decrease) increase in tax reserves		-26	%		5	%		-3	%
Other items, net		0	%		-2	%		0	%

Effective tax rate		3	%		21	%		26	%

The components of the provision (benefit) for income taxes on continuing operations are as follows:


	July 31,
	2012			2011			2010
Current income taxes (benefit):
Federal	$	3,403		$	5,461		$	7,723
State		541			534			344
Foreign		232			(37	)		(183	)

		4,176			5,958			7,884

Deferred income taxes (benefit):
Federal	$	(3,339	)		(113	)		(2,361	)
State		25			167			107
Foreign		264			(1,700	)		38

		(3,050	)		(1,646	)		(2,216	)

	$	1,126		$	4,312		$	5,668

Income from continuing operations before income taxes from domestic and foreign operations is as follows:


	July 31,
	2012		2011		2010
Domestic	$	30,249	$	15,676	$	16,336
Foreign		13,950		5,256		5,131

	$	44,199	$	20,932	$	21,467

Net deferred taxes, detailed below, recognize the impact of temporary differences between the amounts of assets and liabilities recorded for financial statement purposes and such amounts measured in accordance with tax laws:


	July 31,
	2012			2011
Depreciation related	$	(5,299	)	$	(4,523	)
Goodwill and intangibles		1,110			2,168
Compensation		14,233			9,863
Accruals and reserves		4,987			4,149
Comprehensive income		1,219			2,849
Net operating loss and credit carryforwards		7,140			6,730
Other		1,705			538

	$	25,095		$	21,774
Valuation allowance		(5,537	)		(5,167	)

Total deferred taxes	$	19,558		$	16,607

The Company received a refund of $12,007 in the second quarter of fiscal year 2012 as the result of the completion of an U.S. Internal Revenue Service (“IRS”) audit of U.S. Federal income tax returns for the fiscal years ended July 31, 2003, 2005, and 2008. The refund was largely the result of Federal research and experimentation credits that carryover from the fiscal years 1991 through 2000 into the audited returns. The Company recorded a tax benefit for this refund, including the related interest, in the Consolidated Statement of Operations of $10,025 in the fiscal year ended July 31, 2012. Related to the refund and interest were contingent professional fees of $2,714 that were recorded in general and administrative expenses in the Consolidated Statement of Operations in the fiscal year ended July 31, 2012. In connection with the conclusion of the IRS audit, the Company recorded a benefit from the reversal and re-measurement of related tax reserves of $2,308 in the Consolidated Statement of Operations in the fiscal year ended July 31, 2012. An additional benefit of $358 was recorded in the current fiscal year for the reversal of tax reserves for certain state and non-U.S. taxes.

The Company does not provide for U.S. Federal income taxes on undistributed earnings of consolidated foreign subsidiaries, as such earnings are intended to be indefinitely reinvested in those operations. Determination of the potential deferred income tax liability on these undistributed earnings is not practicable because such liability, if any, is dependent on circumstances that exist if and when remittance occurs. The circumstances that would affect the calculations would be the source location and amount of the distribution, the underlying tax rate already paid on the earning, foreign withholding taxes and the opportunity to use foreign tax credits.

As of July 31, 2012, the Company had net operating loss carryforwards in Belgium of approximately $3,659 which have no expiration date, losses of $378 in Italy that expire in 2017 and losses of $781 in China that will begin to expire in 2015. As of July 31, 2012, the Company also had state tax credit carryforwards of $8,519 that will expire in 2025.

Management has determined that it is more likely than not that the Company will not recognize the benefit of certain foreign losses, state losses, and tax credits and, as a result, valuation allowances have been established at July 31, 2012 and July 31, 2011. The change in the valuation allowance in fiscal year 2012 is primarily the result of the addition of state credits where use cannot be assured and the reversal of the $148 valuation allowance for the operation in China.

Management performs a two-step evaluation of all tax positions, ensuring that these tax return positions meet the “more likely than not” recognition threshold and can be measured with sufficient precision to determine the benefit recognized in the financial statements. These evaluations provide management with a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements certain tax positions that the Company has taken or expects to take on its income tax returns.

The following table summarizes the changes in the Company’s unrecognized income tax benefits for fiscal years 2012 and 2011:


	2012			2011
Balance as of beginning of fiscal year	$	16,250		$	12,124
Increases based on tax positions related to current year		790			1,180
Increases for tax positions of prior years		27			3,455
Decreases for tax positions of prior years		(180	)		(37	)
Decreases due to settlements with taxing authorities		(9,802	)		(111	)
Decreases due to lapse of the applicable statute of limitations		(303	)		(387	)
Adjustment due to foreign exchange rate		(26	)		26

Balance as of end of fiscal year	$	6,756		$	16,250

Net interest as of end of fiscal year	$	640		$	1,485

The unrecognized tax benefits have decreased to $6,756 at July 31, 2012 and, if recognized in a future period, the timing of which is not estimable, the net unrecognized tax benefit of approximately $6,756 would reduce the Company’s effective tax rate.

The Company is subject to U.S. Federal income tax as well as the income tax of multiple state and foreign jurisdictions. The Company has concluded all U.S. Federal income tax matters through the year ended July 31, 2008. In the next four quarters, the statute of limitations for the Company’s fiscal years ended July 31, 2009 and July 31, 2007 may expire for U.S. Federal and state income taxes and for foreign subsidiaries, respectively, and it is reasonably expected that net unrecognized benefits, including interest, of approximately $900 may be recognized. During the fiscal year 2012, the Company reduced its uncertain tax benefits and accrued interest by $11,389 as a result of the completion of the audits of fiscal years 2003, 2005 and 2008, closing of statutes of limitation for the fiscal year 2006 for foreign subsidiaries and 2008 for domestic entities and the re-measurement of uncertain tax benefits in open years.

The Company accrues interest and, if applicable, penalties for any uncertain tax positions. This interest and penalty expense is treated as a component of income tax expense. At July 31, 2012 and July 31, 2011, the Company had approximately $640 and $1,485, respectively, accrued for interest and penalties on unrecognized tax benefits.

Refundable and deferred income taxes at July 31, 2012 consisted of deferred tax assets of $8,810 and refundable income tax assets of $976. Refundable and deferred income taxes at July 31, 2011 consisted of deferred tax assets of $8,389 and refundable income tax assets of $1,288. The refundable income tax assets include expected federal, state, and foreign refunds that are expected to be received within the next twelve months.