Note 7.

Income Taxes

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


Year Ended June 30,	2012			2011			2010
($000)
Current:
Federal	$	283		$	4,566		$	5,031
State		227			1,050			219
Foreign		16,533			15,196			8,283
Total Current	$	17,043		$	20,812		$	13,533
($000)
Deferred:
Federal	$	3,409		$	868		$	(978	)
State		(356	)		(357	)		(509	)
Foreign		(2,476	)		(2,579	)		536
Total Deferred	$	577		$	(2,068	)	$	(951	)
Total Income Tax Expense	$	17,620		$	18,744		$	12,582

Principal items comprising deferred income taxes were as follows:


June 30,	2012			2011
($000)
Deferred income tax assets
Inventory capitalization	$	6,328		$	4,297
Non-deductible accruals		1,755			1,583
Accrued employee benefits		6,364			6,163
Net-operating loss and credit carryforwards		10,079			3,619
Share-based compensation expense		11,534			9,092
Other		563			269
Valuation allowances		(846	)		(896	)
Total deferred income tax assets	$	35,777		$	24,127
Deferred income tax liabilities
Tax over book accumulated depreciation	$	(14,166	)	$	(12,113	)
Intangible assets		(13,907	)		(8,872	)
Other		(2,855	)		(1,706	)
Total deferred income tax liabilities	$	(30,928	)	$	(22,691	)
Net deferred income taxes	$	4,849		$	1,436

The reconciliation of income tax expense at the statutory federal rate to the reported income tax expense is as follows:


Year Ended June 30,	2012			%			2011			%			2010			%
($000)
Taxes at statutory rate	$	27,614			35		$	35,617			35		$	17,961			35
Increase (decrease) in taxes resulting from:
State income taxes – net of federal benefit		(187	)		—			312			—			(180	)		—
Taxes on non U.S. earnings		(6,628	)		(9	)		(14,004	)		(14	)		(6,225	)		(12	)
Settlement of unrecognized tax benefits		(842	)		(1	)		—			—			—			—
Research and manufacturing incentive deductions		(2,079	)		(3	)		(2,515	)		(2	)		(318	)		(1	)
Other		(258	)		—			(666	)		(1	)		1,344			3
	$	17,620			22		$	18,744			18		$	12,582			25

During the fiscal years ended June 30, 2012, 2011, and 2010, net cash paid by the Company for income taxes was $13.2 million, $22.7 million, and $5.8 million, respectively.

Earnings before income taxes of our non-U.S. operations for June 30, 2012, 2011 and 2010 were $62.9 million, $85.4 million, and $41.4 million, respectively. The Company has not recorded deferred income taxes applicable to undistributed earnings of foreign subsidiaries that are indefinitely reinvested outside the U.S. If the earnings of such foreign subsidiaries were not indefinitely reinvested, an additional deferred tax liability of approximately $93.0 million and $83.0 million would have been required as of June 30, 2012 and 2011, respectively. It is the Company’s intention to permanently reinvest undistributed earnings of its foreign subsidiaries; therefore, no provision has been made for future income taxes on the undistributed earnings of foreign subsidiaries, as they are considered indefinitely reinvested.

The Company’s Vietnam subsidiary operated under a tax holiday and did not pay income taxes through fiscal year 2010. For the year ended June 30, 2011, Vietnam’s income tax rate was approximately 5%. For the year ended June 30, 2012, Vietnam’s income tax rate was approximately 7.5%.

The sources of differences resulting in deferred income tax expense (benefit) from continuing operations and the related tax effect of each were as follows:


Year Ended June 30,	2012			2011			2010
($000)
Depreciation and amortization	$	38		$	2,754		$	(818	)
Inventory capitalization		(1,947	)		(2,661	)		985
Net operating loss and credit carryforwards net of valuation allowances		1,859			509			744
Share-based compensation expense		(2,442	)		(1,801	)		(2,084	)
Other		3,069			(869	)		222
	$	577		$	(2,068	)	$	(951	)

The Company has the following gross operating loss carryforwards and tax credit carryforwards as of June 30, 2012:


Type	Amount		Expiration Date
($000)
Tax credit carryforwards:
Federal research and development credits	$	1,729	June 2019 – June 2030
State tax credits		1,301	June 2013 – June 2027
Foreign tax credits		1,128	June 2019 – June 2022
Operating loss carryforwards:
Loss carryforwards – federal	$	14,035	June 2024 – June 2029
Loss carryforwards – state		4,161	June 2013 – June 2032
Loss carryforwards – foreign		1,591	June 2016 – June 2019
Loss carryforwards – foreign		1,548	Indefinite

The Company has recorded a valuation allowance against the majority of the foreign loss carryforwards and select state tax credit carryforwards. The Company’s federal loss carryforwards, federal research and development credit carryforwards, and certain state tax credits resulted from the Company’s acquisition of Aegis and are subject to various annual limitations under Section 382 of the Internal Revenue Code.

Changes in the liability for unrecognized tax benefits for the fiscal years ended June 30, 2012, 2011 and 2010 were as follows:


	2012			2011			2010
($000)
Balance at Beginning of Year	$	4,744		$	4,199		$	2,575
Increases in current year tax positions		738			1,716			1,705
Increases in prior year tax positions		—			—			—
Decreases in prior year tax positions		(41	)		—			—
Settlements		(1,788	)		—			—
Expiration of statute of limitations		(803	)		(1,171	)		(81	)
Balance at End of Year	$	2,850		$	4,744		$	4,199

The Company classifies all estimated and actual interest and penalties as income tax expense. During the years ended June 30, 2012 and 2011, the Company recognized a $0.2 million benefit and a $0.1 million benefit, respectively, of interest and penalties within income tax expense. The Company had $0.1 million and $0.2 million of interest and penalties accrued at June 30, 2012 and 2011, respectively. The Company has classified the uncertain tax positions as non-current income tax liabilities as the amounts are not expected to be paid within one year. Including tax positions for which the Company determined that the tax position would not meet the more-likely-than-not recognition threshold upon examination by the tax authorities based upon the technical merits of the position, the total estimated unrecognized tax benefit that, if recognized, would affect our effective tax rate was approximately $2.8 million at June 30, 2012. The Company does not expect the total amount of unrecognized tax benefits to significantly change in the next twelve months.

In December 2011, the Internal Revenue Service completed its examination of the Company’s federal income tax return for fiscal year 2009 with no significant findings. As a result, during the fiscal year ended June 30, 2012, the Company reversed certain unrecognized tax benefits from fiscal year 2009 and recognized an income tax benefit of approximately $0.8 million.

Fiscal years 2010 to 2012 remain open to examination by the United States Internal Revenue Service, fiscal years 2008 to 2012 remain open to examination by certain state jurisdictions, and fiscal years 2005 to 2012 remain open to examination by certain foreign taxing jurisdictions. The Company’s fiscal years 2007, 2008 and 2009 California state income tax returns are currently under examination by the State of California’s Franchise Tax Board.