INCOME TAXES

Income taxes have been provided at an overall effective rate of 20.6% and 31.8% for the nine month periods ended June 30, 2012 and 2011, respectively. Our effective tax rate will vary based on a variety of factors, including overall profitability, the geographical mix of income before taxes and related statutory tax rate in each jurisdiction, and discrete events, such as settlements of audits.

In the first nine months of fiscal 2012, we recorded a discrete tax benefit of $1.2 million, which included a benefit of $1.1 million recorded in the third fiscal quarter of 2012 for additional research and development tax credits identified for fiscal years ended September 30, 2009, 2010 and 2011. These additional tax credits resulted from a recently completed research and development tax credit study. During the first quarter of fiscal 2012, we recorded a discrete tax benefit of $0.1 million resulting from the release of income tax reserves due to the expiration of the statutes of limitations from various U.S. tax jurisdictions. These discrete tax benefits reduced our effective tax rate by 18.6 percentage points for the nine month period ended June 30, 2012. Our income tax rate before consideration of discrete tax benefits is higher for the nine months ended June 30, 2012 as compared to the nine months ended June 30, 2011 primarily due to expiration of the research and development tax credit on December 31, 2011 for the current fiscal year and a reduction in domestic tax benefits.

In the first quarter of fiscal 2011, we recorded a discrete tax benefit of $0.6 million. This benefit primarily resulted from the reversal of tax reserves from various jurisdictions related to the expiration of the statutes of limitations. It also resulted from the enactment of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 extending the research and development tax credit that allowed us to record tax credits earned during the last three quarters of fiscal 2010 in the first quarter of fiscal 2011. This benefit reduced our effective tax rate by 4.8 percentage points for the nine month period ended June 30, 2011 to 31.8%.

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




Unrecognized tax benefits as of September 30, 2011	$	2,061
Increases related to:
Prior year income tax positions	631
Decreases related to:
Prior year income tax positions	(67		)
Expiration of statute of limitations	(83		)
Unrecognized tax benefits as of June 30, 2012	$	2,542

The total amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate is $2.5 million. There are no tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will increase or decrease significantly over the next 12 months.

We recognize interest and penalties related to income tax matters in income tax expense. During both the three and nine month periods ended June 30, 2012 and 2011, there were insignificant amounts of interest and penalties related to income tax matters in income tax expense. We had accrued interest and penalties related to unrecognized tax benefits as of both June 30, 2012 and September 30, 2011, of $0.6 million. Our long-term income taxes payable on our condensed consolidated balance

8. INCOME TAXES (CONTINUED)

sheets includes these accrued interest and penalties in addition to the unrecognized tax benefits in the table above.

At June 30, 2012, we had approximately $17.3 million of accumulated undistributed foreign earnings, for which we have not accrued additional U.S. tax. Our policy is to reinvest earnings of our foreign subsidiaries indefinitely to fund current operations and provide for future international expansion opportunities, and only repatriate earnings to the extent that U.S. taxes have already been recorded. Although we have no current need to do so, if we change our unremitted assertion to repatriate additional undistributed foreign earnings for cash requirements in the United States, we would have to accrue applicable taxes. Since the amount of any taxes and the application of any tax credits would be determined based on the income tax laws at the time of such repatriation, it is not practicable to determine the unrecognized deferred tax liability; however, based on current tax laws and structures, we do not believe this would have a material impact on our current consolidated financial position, results of operations and cash flows.

We operate in multiple tax jurisdictions both in the U.S. and outside of the U.S. Accordingly, we must determine the appropriate allocation of income to each of these jurisdictions. This determination requires us to make several estimates and assumptions. Tax audits associated with the allocation of this income, and other complex issues, may require an extended period of time to resolve and may result in adjustments to our income tax balances in those years that are material to our consolidated balance sheet and results of operations. We are no longer subject to income tax examination for tax years prior to fiscal 2009 in the case of U.S. federal tax authorities and prior to fiscal 2007 for non-U.S. income tax authorities. For state taxing authorities, consisting primarily of Minnesota and California, we are no longer subject to income tax examination for tax years generally before fiscal 2007.