INCOME TAXES

Income taxes have been provided at an overall effective rate of 33.4% and 30.1% for the three month periods ended December 31, 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 three months of fiscal 2013, we recorded a discrete tax benefit of $0.1 million for the release of income tax reserves due to the expiration of the statutes of limitation from various U.S. and foreign tax jurisdictions. These discrete tax benefits reduced our effective tax rate by 7.8 percentage points for the three month period ended December 31, 2012.

In the first three months of fiscal 2012, we recorded a discrete tax benefit of $0.1 million for the release of income tax reserves due to the expiration of statutes of limitation from various U.S. tax jurisdictions. This discrete tax benefit reduced our effective tax rate by 11.9 percentage points for the three month period ended December 31, 2011.

The effective tax rates for both the first quarters of fiscal 2013 and 2012, before consideration of the impact of discrete tax benefits, were higher than the statutory rate primarily due to lower domestic tax benefits and increases in certain tax reserves.

The American Taxpayer Relief Act of 2012, enacted January 2, 2013 retroactively extended the federal research and development tax credit for two years retroactively from January 1, 2012 through December 31, 2013. We will record the benefit for research credit earned for the last three quarters of fiscal 2012 of $0.4 million as a discrete tax benefit in the second quarter of fiscal 2013. In addition, beginning with the second quarter of fiscal 2013, our effective tax rate will include a tax benefit for the projected credit for the full fiscal year.

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




Unrecognized tax benefits as of September 30, 2012	$	2,720
Decreases related to:
Expiration of statute of limitations	(98		)
Unrecognized tax benefits as of December 31, 2012	$	2,622

The total amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate is $2.6 million. We expect that it is reasonably possible that the total amounts of unrecognized tax benefits will increase approximately $0.4 million to $0.5 million over the next 12 months due to additional reserves for federal research credits and increases in current year reserves, partially offset by the expiration of the statute of limitations.

We recognize interest and penalties related to income tax matters in income tax expense. During both the three month periods ended December 31, 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 December 31, 2012 and September 30, 2012 of $0.5 million and $0.6 million, respectively. Our long-term income taxes payable on our condensed consolidated balance sheets includes these accrued interest and penalties in addition to the unrecognized tax benefits in the table above.

At December 31, 2012, we had approximately $23.3 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 assertion that we do not intend to repatriate additional undistributed foreign earnings for cash requirements in the United States, we would have to accrue applicable taxes. 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. Under current tax laws, we estimate the unrecognized deferred tax liability to be in the range of $2.5 million to $3.5 million and could have a material impact on our current consolidated balance sheet, 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

8. INCOME TAXES (CONTINUED)

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 2008 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 2008.