Note 12: Income Taxes

Our effective tax rate for the current period was greatly impacted by the release of a portion of the valuation allowance relating to U.S. federal and state deferred tax assets. Absent this discrete adjustment, the effective tax rate for the period would have been 37.1%, compared to 42.9% for the first quarter of fiscal 2011. This was lower than the prior year due to certain U.S. tax adjustments not recognized (as a result of the valuation allowance) and minor discrete items in the first quarter of fiscal 2011.

The valuation allowance was originally established in fiscal year 2009 based on our cumulative pretax losses in the U.S. at that time and uncertainty as to when those losses would reverse. In the first quarter of fiscal 2012, we moved from a three year cumulative loss position to a three year cumulative income position by generating sufficient positive pretax income to recover the pre-existing cumulative losses.

Realization of our deferred tax assets is dependent on (among other things) generating sufficient future taxable income. Based upon (i) our cumulative pretax income position and (ii) our most recent operating results, including pre-tax income amounts in our first fiscal quarter which exceeded both our operating plan and prior year first quarter results and (iii) our most current forecasts, all of which caused us to reconsider our concerns regarding the fiscal 2012 economic environment, we have concluded that certain valuation allowances totaling $43.4 million associated with certain U.S. federal and state deferred tax assets should be reduced in the first quarter of fiscal 2012 because we now believe that it is more likely than not that the value of these deferred tax assets will be realized. This reduction of the valuation allowance is reflected in the accompanying Consolidated Balance Sheet as an increase to deferred income tax assets - current of $20.1 million and an increase to deferred income tax assets - long-term of $23.3 million.

In connection with our analysis of the total amounts of the valuation allowance to be reduced, we conducted an updated analysis of our deferred tax assets position as of April 30, 2011. As a result of this analysis, we determined that our total gross deferred tax assets at April 30, 2011 should be reduced by $8.7 million, with a corresponding decrease to the related valuation allowance for the same amount. The adjustments to reduce our gross deferred tax balances were primarily related to unrealized gains on our investments, employee benefit plan arrangements and state income taxes. Changes in our valuation allowance in the first quarter of fiscal 2012 were as follows:

(Unaudited, amounts in thousands)
Beginning balance	$	65,748
Reduction to beginning gross deferred tax asset balances		(8,726	)
Valuation allowance reversal		(43,386	)
Ending balance	$	13,636

The remaining valuation allowance of $13.6 million includes $11.1 million related to certain U.S. federal and state deferred tax assets and $2.5 million associated with foreign deferred tax assets. The U.S federal deferred tax assets primarily represent capital losses which expire in 2013. The state deferred taxes are primarily related to certain state net operating losses. Foreign deferred tax assets relate primarily to net operating losses. The valuation allowance related to the foreign deferred tax assets could be reduced later in fiscal 2012, based on, among other factors, the level of estimated future taxable income generated in that foreign jurisdiction in fiscal 2012 and beyond.