Annual report pursuant to Section 13 and 15(d)

Note 12 - Income Taxes

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Note 12 - Income Taxes
 12 Months Ended
Jun. 30, 2012
Income Tax Disclosure [Text Block]
(12)           Income Taxes

Income tax expense (benefit) attributable to income from operations consists of the following for the fiscal years ended June 30 (in thousands):

   
2012
   
2011
   
2010
 
Current:
                 
Federal
  $ 13,086     $ (4,428 )   $ (11,497 )
State
    (1,433 )     1,505       3,106  
Foreign
    57       107       131  
Total current
    11,710       (2,816 )     (8,260 )
Deferred:
                       
Federal
    (20,896 )     (1,432 )     33,290  
State
    591       1,369       490  
Foreign
    140       -       9  
Total deferred
    (20,165 )     (63 )     33,789  
Income tax expense (benefit)
  $ (8,455 )   $ (2,879 )   $ 25,529  

The following is a reconciliation of expected income tax expense (benefit) (computed by applying the federal statutory income tax rate to income before taxes) to actual income tax expense (benefit) (in thousands):

   
2012
   
2011
   
2010
 
                                     
Expected income tax expense (benefit)
  $ 14,434       35.0 %   $ 9,228       35.0 %   $ (6,575 )     35.0 %
State income taxes (benefit), net of federal income tax
    1,038       2.5 %     750       2.8 %     (717 )     3.8 %
Valuation allowance
    (21,237 )     -51.5 %     (12,672 )     -48.1 %     34,139       -181.7 %
Section 199 Qualified Production Activities deduction
    (1,001 )     -2.4 %     (705 )     -2.7 %     -       0.0 %
Unrecognized tax expense (benefit)
    (1,483 )     -3.6 %     490       1.9 %     (2,232 )     11.9 %
Other, net
    (206 )     -0.5 %     30       0.1 %     914       -4.9 %
Actual income tax expense (benefit)
  $ (8,455 )     -20.5 %   $ (2,879 )     -10.9 %   $ 25,529       -135.9 %

The deferred income tax asset and liability balances at June 30 (in thousands) include:

   
2012
   
2011
 
Deferred tax assets:
           
Accounts receivable
  $ 470     $ 439  
Employee compensation accruals
    6,321       5,962  
Stock based compensation
    2,617       2,680  
Deferred rent credits
    5,283       5,587  
Restructuring charges
    526       944  
Net operating loss carryforwards
    3,066       3,525  
Goodwill
    6,251       7,451  
Other, net
    3,829       5,153  
Total deferred tax assets
    28,363       31,741  
Less: Valuation allowance
    (2,317 )     (23,554 )
Net deferred tax assets
    26,046       8,187  

   
2012
   
2011
 
Deferred tax liabilities:
           
Inventories
    2,068       3,202  
Property, plant and equipment
    536       1,149  
Intangible assets other than goodwill
    14,264       14,225  
Commissions
    3,880       3,834  
Other, net
    22       23  
Total deferred tax liability
    20,770       22,433  
Net deferred tax asset (liability)
  $ 5,276     $ (14,246 )

The deferred tax balances are classified in the Consolidated Balance Sheets as follows at June 30 (in thousands):

   
2012
   
2011
 
Current assets
  $ 2,147     $ -  
Non-current assets
    3,129       -  
Current liabilities
    -       (6,212 )
Non-current liabilities
    -       (8,034 )
Total net deferred tax asset (liability)
  $ 5,276     $ (14,246 )

Note:   Current deferred tax assets and liabilities and non-current deferred tax assets and liabilities have been presented net in the Consolidated Balance Sheets.

We evaluate our deferred taxes to determine if the “more likely than not” standard of evidence has not been met thereby supporting the need for a valuation allowance.

A valuation allowance must be established for deferred tax assets when it is more likely than not that the assets will not be realized. As a result of losses we sustained for fiscal 2010 and 2009, which were brought on by the severe economic factors which began in fiscal 2009, we recorded a $34.1 million valuation allowance against deferred tax assets, with a non-cash charge to earnings in the fourth quarter of fiscal 2010. At the end of the third quarter of fiscal 2012, our operations had returned to a position of cumulative pre-tax operating profits for the most recent 36 month period, we had eight consecutive quarters of pre-tax operating profits, our written business and backlog had grown significantly, and our business plan projected continued profitability. The preponderance of this positive evidence provides support that our future tax benefits more likely than not will be realized. Accordingly, at the end of the third quarter of fiscal 2012, we released all of United States federal and Canadian valuation allowance against net deferred tax assets. We recorded a tax benefit of $21.6 million for the reversal of the valuation allowance against those assets, with a non-cash benefit to earnings in the quarter ended March 31, 2012. Previously unrealized tax benefits of $1.9 million were also realized during the quarter ended March 31, 2012. We retained a valuation allowance against various state and local deferred tax assets in our retail segment. At June 30, 2012 this valuation allowance was approximately $2.3 million.

The Company’s deferred income tax assets at June 30, 2012 with respect to the net operating losses expire as follows (in thousands):

   
Deferred
Income
Tax Assets
   
Net Operating
Loss
Carryforwards
 
United States (State), expiring between 2013 and 2032
  $ 2,702     $ 57,847  
Foreign, Expiring between 2029 and 2030
    364       1,334  

Deferred U.S. federal income taxes are not provided for unremitted foreign earnings of our foreign subsidiaries because we expect those earnings will be permanently reinvested.

Uncertain Tax Positions

We recognize interest and penalties related to income tax matters as a component of income tax expense. If the $7.4 million of unrecognized tax benefits and related interest and penalties as of June 30, 2012 were recognized, approximately $4.7 million would be recorded as a benefit to income tax expense. A reconciliation of the beginning and ending amount of unrecognized tax benefits including related interest and penalties as of June 30, 2012 and 2011 is as follows (in thousands):

   
2012
   
2011
 
Beginning balance
  $ 11,027     $ 11,476  
Additions based on tax positions in the current year
    550       2,400  
Additions for tax positions in prior years
    524       868  
Reductions for tax positions of prior years
    (3,543 )     (2,778 )
Settlements
    (1,189 )     (939 )
Ending balance
  $ 7,369     $ 11,027  

It is reasonably possible that various issues relating to approximately $3.9  million of the total gross unrecognized tax benefits as of June 30, 2012 will be resolved within the next twelve months as exams are completed or statutes expire. If recognized, approximately $2.5 million of unrecognized tax benefits would reduce our tax expense in the period realized. However, actual results could differ from those currently anticipated.

The Company conducts business globally and, as a result, the Company or one or more of its subsidiaries files income tax returns in the U.S., various state, and foreign jurisdictions. In the normal course of business, the Company is subject to examination by the taxing authorities in such major jurisdictions the U.S, Canada, Mexico and Honduras. As of June 30, 2012, the Company and certain subsidiaries are currently under audit from 2006 through 2010 in the U.S. While the amount of uncertain tax benefits with respect to the entities and years under audit may change within the next twelve months, it is not anticipated that any of the changes will be significant.