Provision for Income Taxes

6 Months Ended

Jan. 31, 2013

Provision for Income Taxes

10. Provision for Income Taxes

The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current period and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. The Company recognizes liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires the Company to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as the probability of various possible outcomes must be determined. The uncertain tax positions are re-evaluated on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision.

It is the Company’s policy to recognize interest and penalties accrued relative to unrecognized tax benefits in income tax expense. For the six month period ended January 31, 2013, the Company released $4,814 of gross uncertain tax benefit reserves and related interest and penalties recorded at July 31, 2012 related to the effective settlement of certain uncertain tax benefits and statute of limitation expirations, which resulted in a net income tax benefit of $1,814. The Company accrued $697 in interest and penalties related to the remaining uncertain tax benefits recorded at July 31, 2012, and accrued an additional uncertain tax benefit reserve of $222 related to previous tax periods. For the three month period ended January 31, 2013, the Company released $4,567 of gross uncertain tax benefit reserve recorded at July 31, 2012, which resulted in a net income tax benefit of $1,675, recorded $222 of additional uncertain tax benefit reserve related to previous tax periods, and accrued $334 in interest and penalties.

Generally, fiscal years 2009, 2010 and 2011 remain open for federal, state and foreign income tax purposes. The Company and its subsidiaries file a consolidated U.S. federal income tax return and multiple state income tax returns. The federal returns are subject to examination by taxing authorities for all years after fiscal 2008. The Company is currently being audited by the state of California for tax years ended July 31, 2007 and July 31, 2008 and by the state of Indiana for tax years ended July 31, 2008, 2009 and 2010. The Company believes it has fully reserved for its exposure to additional payments for uncertain tax positions related to its California and Indiana income tax returns in its liability for unrecognized tax benefits.

The overall effective income tax rate for the three months ended January 31, 2013 was 22.1% compared with 36.4% for the three months ended January 31, 2012. The overall effective income tax rate for the six months ended January 31, 2013 was 30.4% compared with 35.8% for the six months ended January 31, 2012. The primary reason for the decrease in the overall effective income tax rates for the three months and six months ended January 31, 2013 was the effective favorable settlement of certain state uncertain tax benefits during the fiscal 2013 periods. The Company also recorded a tax benefit from the retroactive reinstatement of the Federal research and development credit and other credits that were enacted on January 2, 2013.

The Company anticipates a decrease of approximately $3,500 in unrecognized tax benefits, and $800 in accrued interest and penalties related to these unrecognized tax benefits, within the next 12 months from expected settlements or payments of uncertain tax positions and lapses of the applicable statutes of limitations. In addition, the Company is currently in the process of pursuing a variety of settlement alternatives with taxing authorities. It is reasonably possible that some of these settlements could be finalized in the next 12 months. If these settlements are finalized within the next 12 months, the gross unrecognized tax benefits may decrease between $3,200 and $9,400 and related accrued interest and penalties may decrease between $1,800 and $4,800. It is reasonably possible that some of these settlements will result in cash payments by the Company. Actual results may differ materially from these estimates.