INCOME TAXES

Income from continuing operations before provision for income taxes and loss of unconsolidated affiliates includes the following components (in thousands):



	Years Ended August 31,
	2012		2011		2010
United States	$	38,121	$	24,259	$	17,390
Foreign	64,593		65,097		54,850
Income from continuing operations before provision for income taxes and loss of unconsolidated affiliates	$	102,714	$	89,356	$	72,240

Significant components of the income tax provision are as follows (in thousands):



	Years Ended August 31,
	2012			2011		2010
Current:
U.S.	$	7,593		$	4,905	$	3,540
Foreign	26,325			21,170		15,054
Total	$	33,918		$	26,075	$	18,594
Deferred:
U.S.	$	1,853		$	375	$	2,973
Foreign	(1,031		)	146		1,870
Valuation allowance charge (release)	313			872		(650		)
Total	$	1,135		$	1,393	$	4,193
Provision for income taxes	$	35,053		$	27,468	$	22,787

As of August 31, 2012, the Company has elected to present the reconciliation of income tax on a percentage basis as compared to a whole dollar basis. The reconciliation of income tax computed at the Federal statutory tax rate to the provision for income taxes is as follows (in percentages):



	Years Ended August 31,
	2012		2011		2010
Federal tax provision at statutory rates	35.0	%	35.0	%	34.0	%
State taxes, net of federal benefit	0.3		0.8		0.5
Differences in foreign tax rates	(3.6	)	(3.7	)	(3.5	)
Permanent items and other adjustments	2.1		(2.4	)	1.4
Increase (decrease) in Foreign valuation allowance	0.3		1.0		(0.9	)
Provision for income taxes	34.1	%	30.7	%	31.5	%

Significant components of the Company’s deferred tax assets as of August 31, 2012 and 2011 are shown below (in thousands):



	August 31,
	2012			2011			2010
Deferred tax assets:
U.S. net operating loss carryforward	$	8,800		$	8,953		$	9,688
U.S. capital loss carryforward	—			—			4,318
U.S. timing differences and alternative minimum tax credits	202			295			1,787
Deferred compensation	1,835			683			921
Foreign tax credits	1,568			3,569			4,944
Foreign deferred taxes net operating losses	8,066			8,662			7,967
Foreign deferred taxes other timing differences	9,048			6,759			6,297
Total deferred tax assets	29,519			28,921			35,922
U.S. valuation allowance	(697		)	(8		)	(8,350		)
Foreign valuation allowance	(8,368		)	(7,661		)	(7,296		)
Net deferred tax assets	$	20,454		$	21,252		$	20,276

As of August 31, 2012 and 2011, the Company had deferred tax liabilities of $2.3 million and $2.4 million, respectively, arising from timing differences in certain subsidiaries.

During fiscal year 2012, the Company incurred current tax expense of $34.0 million and recognized a net deferred tax expense of $1.1 million, resulting in a net tax expense of $35.1 million. During fiscal year 2011, the Company incurred current tax expense of $26.1 million and recognized a net deferred tax expense of $1.4 million, resulting in a net tax expense of $27.5 million. The effective tax rate for fiscal year 2012 is 34.1%, as compared to the effective tax rate for fiscal year 2011 of 30.7%. For fiscal year 2012, the increase in the effective rate versus the prior year was primarily attributable to the following factors: (i) During fiscal year 2012, the Company recorded a valuation allowance of $697,000 against its California net operating loss (NOL), because it does not anticipate being able to utilize the NOL. The Company intends to make a single sales factor election for fiscal year 2012 and subsequent years. This election will significantly reduce the California apportionment factor and, therefore, California taxable income. (ii) In fiscal year 2011, the Company recorded a $3.1 million decrease in tax expense due to an error identified in the Company's reconciliations of net deferred tax assets related to net operating and capital loss carryforwards to its tax returns.

For fiscal year 2012, management concluded that a valuation allowance continues to be necessary for certain U.S. and foreign deferred tax asset balances, primarily because of the existence of significant negative objective evidence, such as the fact that certain subsidiaries are in a cumulative loss position for the past three years, and the determination that certain net operating loss carryforward periods are not sufficient to realize the related deferred tax assets. The Company factored into its analysis the inherent risk of forecasting revenue and expenses over an extended period of time and also considered the potential risks associated with its business. As noted above, during fiscal year 2012, the Company recorded a valuation allowance of $697,000 against its California net operating loss. There were no reversals of previously recorded foreign valuation allowances during fiscal year 2011. In fiscal year 2012, a valuation allowance of $377,000 was reversed, because the net operating loss, for which the valuation allowance was recorded, was fully utilized in fiscal year 2012. The Company had net foreign deferred tax assets of $8.7 million and $7.8 million as of August 31, 2012 and 2011, respectively.

The Company has U.S. federal and state tax NOL's at August 31, 2012 of approximately $24.8 million and $8.1 million, respectively. The federal and state NOL's generally expire during periods ranging from 2015 through 2025, unless previously utilized. Generally for U.S. federal and U.S. Virgin Islands tax reporting purposes, the statute of limitations is three years from the date of filing of the income tax return. If and to the extent the tax year resulted in a taxable loss, the statute is extended to three years from the filing date of the income tax return in which the carryforward tax loss was used to offset taxable income in the carryforward year. In calculating the tax provision and assessing the likelihood that the Company will be able to utilize the deferred tax assets, the Company considered and weighed all of the evidence, both positive and negative, and both objective and subjective. The Company factored in the inherent risk of forecasting revenue and expenses over an extended period of time and considered the potential risks associated with its business. Using the Company's U.S. income from continuing operations and projections of future taxable income in the U.S., the Company was able to determine that there was sufficient positive evidence to support the conclusion that it was more likely than not that the Company would be able to realize substantially all of its U.S. NOLs by generating taxable income during the carryforward period. However, if the Company does not achieve its projections of future taxable income in the U.S., the Company could be required to take a charge to earnings related to the recoverability of these deferred tax assets.

The Company has determined that due to a deemed change of ownership (as defined in Section 382 of the Internal Revenue Code) in October 2004, there will be annual limitations in the amount of U.S. profits that may be offset by NOLs. The NOLs generated prior to the deemed ownership change date, as well as a significant portion of the losses generated as a result of the PSMT Philippines disposal in August 2005, will be limited on an annual basis. This annual limitation is approximately $3.5 million per year. The Company does not believe this will impact the recoverability of these NOLs.

The Company does not provide for income taxes which would be payable if undistributed earnings of its foreign subsidiaries were remitted, because the Company considers these earnings to be permanently reinvested. As of August 31, 2012 and 2011, the undistributed earnings of these foreign subsidiaries are approximately $186.7 million and $144.7 million, respectively. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes and withholding taxes payable to the foreign countries, but would also be able to offset unrecognized foreign tax credits. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable because of the complexities associated with its hypothetical calculation.

The Company accrues for the estimated additional amount of taxes for uncertain income tax positions if the likelihood of sustaining the tax position does not meet the more likely than not standard for recognition of tax benefits.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):



	2012			2011			2010
Balance at beginning of fiscal year	$	13,528		$	13,615		$	13,851
Additions based on tax positions related to the current year	575			1,130			429
Reductions for tax positions of prior years	—			—			(166		)
Settlements	(591		)	(643		)	(21		)
Expiration of the statute of limitations for the assessment of taxes	(2,300		)	(574		)	(478		)
Balance at end of fiscal year	$	11,212		$	13,528		$	13,615

As of August 31, 2012, the liability for income taxes associated with uncertain tax benefits was $11.2 million and can be reduced by $9.4 million of tax benefits associated with state income taxes and other timing adjustments which are recorded as deferred income taxes . The net amount of $1.8 million, if recognized, would favorably affect the Company's financial statements and favorably affect the Company's effective income tax rate.

The Company expects changes in the amount of unrecognized tax benefits in the next 12 months as the result of a lapse in various statutes of limitations. The lapse of statutes of limitations in the 12-month period ending August 31, 2013 is expected to result in a reduction to long-term income taxes payable totaling $860,000.

The Company recognizes interest and/or penalties related to income tax matters in income tax expense. As of August 31, 2012 and 2011, the Company had accrued $800,000 and $1.3 million, respectively, (before income tax benefit) for the payment of interest and penalties.

The Company has various appeals pending before tax courts in its subsidiaries' jurisdictions. Any possible settlement could increase or decrease earnings but is not expected to be significant. Audit outcomes and the timing of audit settlements are subject to significant uncertainty.

The Company or one of its subsidiaries files income tax returns in the US federal jurisdiction and various state and foreign jurisdictions. The Company is generally no longer subject to income tax examinations by tax authorities in its major jurisdictions except for the fiscal years subject to audit as set forth in the table below:



Tax Jurisdiction	Fiscal Years Subject to Audit
U.S. federal	1998, 2000 to 2005, 2009 to the present
California (U.S.) (state return)	2004 to 2005 and 2007 to the present
Florida(U.S.) (state return)	2002 to 2005, 2007 and 2009 to the present
Aruba	2012
Barbados	2006 to the present
Costa Rica	2009 to the present
Colombia	2010 to the present
Dominican Republic	2007 and 2009 to the present
El Salvador	2009 to the present
Guatemala	2008 to the present
Honduras	2007 to the present
Jamaica	2006 to the present
Mexico	2007 to the present
Nicaragua	2008 to the present
Panama	2009 to the present
Trinidad	2004 to the present
U.S. Virgin Islands	2001 to the present

Generally for U.S. federal and U.S. Virgin Islands tax reporting purposes, the statute of limitations is three years from the date of filing of the income tax return. If and to the extent the tax year resulted in a taxable loss, the statute is extended to three years from the filing date of the income tax return in which the carryforward tax loss was used to offset taxable income in the carryforward year. Given the historical losses in these jurisdictions and the Section 382 change in control limitations on the use of the tax loss carryforwards, there is uncertainty and significant variation as to when a tax year is no longer subject to audit.

Cash amounts paid during fiscal year 2012, 2011 and 2010 for income taxes were $29.1 million, $22.4 million, and $19.3 million, respectively.