Income Taxes.

9 Months Ended

Nov. 30, 2011

Income Taxes.

(10) Income Taxes. The Company evaluates its deferred income taxes on a quarterly basis to determine if valuation allowances are required, in full or in part. This includes considering available positive and negative evidence, such as past operating results, the existence of cumulative losses in the most recent fiscal years and our forecast of future taxable income on a jurisdiction-by-jurisdiction basis. In determining future taxable income, we review the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. After analyzing the ability to generate sufficient taxable income to utilize the benefit of the deferred tax assets, the Company had established a valuation allowance on its U.S. and German deferred tax assets as of February 28, 2009. The valuation allowance decreased by $0.7 million and $4.6 million during the three and nine months ended November 30, 2011, primarily due to usage of deferred tax assets during the periods.

There were no other material changes to the Company's valuation allowances during the three and nine months ended November 30, 2011. A full valuation allowance continues to be maintained for the Company's remaining U.S. and German deferred tax assets at November 30, 2011. Should actual operating results and our forecast of future taxable income remain favorable, absent other factors indicating a contrary conclusion, the Company believes a substantial portion of the remaining valuation allowance may be reversed by the end of fiscal 2012. The Company does not anticipate that the total amount of unrecognized tax benefits for uncertain tax positions of $2.4 million at November 30, 2011, will significantly change during the next 12 months.

For the three and nine months ended November 30, 2011, the Company's effective income tax provision for continuing operations was an expense of 10.3% and an expense of 5.9%, respectively, compared with a benefit of 4.5% and an expense of 2.2%, respectively, in the same periods last year. The low rates in both years are due to the utilization of deferred tax assets—principally net operating losses and alternative minimum tax (“AMT”) credits, while maintaining a valuation allowance.