Note 12: Income Taxes

Our effective tax rate for the second quarter of fiscal 2012 was 35.6% compared to 30.3% for the second quarter of fiscal 2011. The effective tax rate for the second quarter of fiscal 2011 was impacted by routine discrete items that resulted in a rate reduction of 11.2%. Our effective tax rate for the six month period of fiscal 2012 was impacted by the release of a portion of the valuation allowance relating to our U.S. federal and state deferred tax assets. Absent this discrete adjustment, the effective tax rate for the first six months of fiscal 2012 would have been 36.0%. The effective tax rate was 23.2% for the first six months of fiscal 2011 after the impact of routine discrete items that resulted in a rate reduction of 17.6%.

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 in the U.S. by generating sufficient positive pretax income to recover the preexisting 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 (ii) our most recent operating results, including pretax 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 certain of our concerns regarding the fiscal 2012 economic environment, we 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 believed that it had become more likely than not that the value of those deferred tax assets will be realized.

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. 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 six months of fiscal 2012 were as follows:

(Unaudited, amounts in thousands)	10/29/11
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, and we believe it is more likely than not that they will not be realized. 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 in future periods, based on, among other factors, the level of cumulative pretax losses and estimated future taxable income generated in that foreign jurisdiction in fiscal 2012 and beyond.

Our consolidated balance sheet at the end of the second quarter of fiscal 2012 reflected a $2.2 million liability for uncertain income tax positions. It is reasonably possible that $0.4 million of this liability will be settled within the next 12 months. The remaining balance will be paid or released as tax audits are completed or settled.