Income Taxes

The domestic and international components of income (loss) before provision for (benefit from) income taxes for the years ended October 26, 2013, October 27, 2012, and October 29, 2011, are presented as follows (in thousands):



	Fiscal Year Ended
	October 26, 2013		October 27, 2012		October 29, 2011 ⁽¹⁾
United States	$	176,536	$	115,736	$	(42,118	)
International	153,925		108,665		121,546
Total	$	330,461	$	224,401	$	79,428


⁽¹⁾	Excludes the impact of repatriation of $200.0 million from offshore operations to the United States.

The income tax expense (benefit) for the years ended October 26, 2013, October 27, 2012, and October 29, 2011, consisted of the following (in thousands):



	Fiscal Year Ended
	October 26, 2013			October 27, 2012			October 29, 2011
U.S. federal taxes:
Current	$	(13,666	)	$	(11,750	)	$	774
Deferred	46,313			33,981			28,111
Total U.S. federal taxes	32,647			22,231			28,885
State taxes:
Current	8,091			613			1,250
Deferred	78,106			(2,412		)	(9,187		)
Total state taxes	86,197			(1,799		)	(7,937		)
Non-U.S. taxes:
Current	2,837			8,770			7,854
Deferred	157			18			16
Total non-U.S. taxes	2,994			8,788			7,870
Total	$	121,838		$	29,220		$	28,818

The difference between the U.S. Federal statutory income tax rate and the Company’s effective tax rate for the years ended October 26, 2013, October 27, 2012, and October 29, 2011, consisted of the following:



	Fiscal Year Ended
	October 26, 2013		October 27, 2012		October 29, 2011
U.S. Federal statutory income tax rate	35.0	%	35.0	%	35.0	%
State taxes, net of federal tax benefit	4.1		3.8		3.3
Foreign income taxed at other than U.S. rates	(17.6	)	(17.7	)	(48.2	)
Stock-based compensation	1.9		3.5		11.8
Research and development credit	(5.6	)	(3.5	)	(17.6	)
Permanent items	0.3		0.3		1.2
Change in liabilities for uncertain tax positions	(5.1	)	(6.5	)	2.5
Repatriation from offshore operations	—		—		62.6
Audit settlement and reinstated tax credit	1.3		(2.9	)	(11.7	)
Change in valuation allowance	23.7		—		—
Other	(1.1	)	1.0		(2.6	)
Effective tax rate	36.9	%	13.0	%	36.3	%

In general, the Company’s provision for income taxes differs from the tax computed at the U.S. Federal statutory income tax rate due to state taxes, the effect of non-U.S. operations, non-deductible stock-based compensation expense and adjustments to unrecognized tax benefits.

The effective tax rate in fiscal year 2013 is higher than the 35% U.S. Federal statutory rate primarily due to a discrete charge of $78.2 million to reduce previously recognized California deferred tax assets due to California law changes. The effective tax rate in fiscal year 2012 is lower than the 35% U.S. federal statutory rate primarily due to earnings in our subsidiaries outside of the U.S. in jurisdictions where our effective tax rate is lower than in the U.S. Earnings of our subsidiaries outside of the U.S. primarily relate to our European and Asia Pacific businesses, which are headquartered in Switzerland and Singapore, respectively. The effective tax rate in fiscal year 2011 is higher than the 35% U.S. Federal statutory rate primarily due to the repatriation of $200.0 million from our offshore operations, with which we repurchased approximately 46.5 million shares of the Company’s stock. The Company recorded tax expense of $49.7 million related to this one-time cash repatriation to fund the stock repurchase program.

As of October 26, 2013, U.S. Federal income taxes and foreign withholding taxes were not provided for on an estimated cumulative total of $525.2 million of undistributed earnings of the Company’s foreign subsidiaries. The Company intends to reinvest current and accumulated earnings of its foreign subsidiaries for expansion of its business operations outside the United States for an indefinite period of time. Our existing cash, cash equivalents and short-term investments totaled $987.0 million as of October 26, 2013. Of this amount, approximately 59% was held by our foreign subsidiaries. If these earnings were distributed to the United States in the form of dividends or otherwise, or if the shares of the relevant foreign subsidiaries were sold or otherwise transferred, the Company could be subject to additional U.S. income taxes, net of foreign tax credits, and foreign withholding taxes. Determination of the amount of unrecognized deferred income tax liability related to these earnings is not practicable.

The components of deferred tax assets and deferred tax liabilities for the years ended October 26, 2013, and October 27, 2012, are presented as follows (in thousands):



	October 26, 2013			October 27, 2012
Net operating loss carryforwards	$	10,525		$	63,750
Stock-based compensation expense	17,664			22,582
Tax credit carryforwards	141,975			145,688
Reserves and accruals	63,765			94,755
Capitalized research and development expenditures	621			3,232
Net unrealized losses on investments	396			468
Gross deferred tax assets	234,946			330,475
Less: Valuation allowance	(81,116		)	(22,269		)
Total deferred tax assets	153,830			308,206
Acquired intangibles and goodwill	(22,307		)	(50,266		)
Fixed assets	(29,878		)	(28,110		)
Other	(2,042		)	(2,116		)
Total deferred tax liabilities	(54,227		)	(80,492		)
Total net deferred tax assets	$	99,603		$	227,714

As of October 26, 2013, the Company believes that sufficient positive evidence exists from historical operations and projections of taxable income in future years to conclude that it is more likely than not that the Company will realize its deferred tax assets except for California deferred tax assets and capital loss carryforwards. Accordingly, the Company applies a valuation allowance to the California deferred tax assets due to the recent change in California law and to capital loss carryforwards due to the limited carryforward periods of these tax assets.

As of October 26, 2013, the Company had federal net operating loss carryforwards of $443.6 million, California state net operating loss carryforwards of $57.1 million and other significant state net operating loss carryforwards of approximately $144.0 million. Additionally, the Company had federal tax credit carryforwards of $155.1 million and state tax credit carryforwards of $164.5 million. The federal net operating loss and tax credit carryforwards expire on various dates between fiscal year 2017 through 2033. The state net operating loss and credit carryforwards expire on various dates between fiscal year 2014 through 2033. Under the current tax law, net operating loss and credit carryforwards available to offset future income in any given year may be limited by statute or upon the occurrence of certain events, including significant changes in ownership interests. As a result of the McDATA, Foundry, and Vyatta acquisitions, all of the tax attributes from these companies are subject to an annual limitation, but the Company expects to use a majority of the tax attributes before expiration.

The Company applies a recognition threshold and measurement attribute for the financial statement recognition and measurement of an income tax position taken or expected to be taken on a tax return. Recognition of a tax position is determined when it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation process. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement with a taxing authority.

A reconciliation of the beginning and ending amount of total gross unrecognized tax benefits, excluding accrued net interest and penalties, is as follows (in thousands):



	October 26, 2013			October 27, 2012
Unrecognized tax benefits, beginning balance	$	119,253		$	149,430
Gross increases for tax positions taken in prior periods	3,472			797
Gross decreases for tax positions taken in prior periods	(12,970		)	(26,001		)
Gross increases for tax positions taken in current period	14,875			6,633
Changes due to settlements with taxing authorities	(9,442		)	(6,771		)
Reductions resulting from lapses of statutes of limitations	(2,709		)	(4,835		)
Unrecognized tax benefits, ending balance	$	112,479		$	119,253

As of October 26, 2013, the Company had net unrecognized tax benefits of $75.8 million, all of which, if recognized, would result in a reduction of the Company’s effective tax rate.

For the fiscal year ended October 26, 2013, the Company recorded an income tax expense of $121.8 million. The tax reported was impacted by a detriment to reduce previously recognized California deferred tax assets as a result of California law changes, partially offset by benefits from reserve release resulting from audit settlements and expired statute of limitations, and an increase in the federal research and development tax credit that was reinstated on January 2, 2013, for two years and made retroactive to January 1, 2012.

For the fiscal year ended October 27, 2012, the Company recorded an income tax expense of $29.2 million. The tax reported was impacted by the effect of a decrease in benefit from the federal research and development tax credit which expired on December 31, 2011, offset by discrete benefits from reserve releases of settled tax audits, and the expiration of certain statutes of limitations.

The IRS and other tax authorities regularly examine the Company’s income tax returns. The IRS is currently examining fiscal years 2009 and 2010. In addition, the Company is in negotiations with foreign tax authorities to obtain correlative relief on transfer pricing adjustments previously settled with the IRS. The Company believes that reserves for unrecognized tax benefits are adequate for all open tax years. The timing of income tax examinations, as well as the amounts and timing of related settlements, if any, are highly uncertain. The Company believes that before the end of fiscal year 2014, it is reasonably possible that either certain audits will conclude or the statutes of limitations relating to certain income tax examination periods will expire, or both. As such, after the Company reaches settlement with the tax authorities, the Company expects to record a corresponding adjustment to the reserves for unrecognized tax benefits. Taking into consideration the inherent uncertainty as to settlement terms, the timing of payments and the impact of such settlements on other uncertain tax positions, the Company estimates the range of potential decreases in underlying uncertain tax positions is between $0 and $4.0 million in the next twelve months.

The Company classifies interest and penalties related to unrecognized tax benefits as a component of income tax expense. During the fiscal year ended October 26, 2013, the Company expensed $0.6 million for net interest and penalties related to income tax liabilities through income tax expense. The total net interest and penalties accrued as of October 26, 2013, was $2.3 million. During the year ended October 27, 2012, the Company expensed $0.5 million for net interest and penalties related to income tax liabilities through income tax expense. The total net interest and penalties accrued as of October 27, 2012, was $2.4 million.

Of the total tax detriments resulting from the exercise of employee stock options and employee participation in the Company’s equity compensation plans, the amounts recorded to stockholders’ equity were approximately $1.5 million in fiscal year 2013, $4.8 million in fiscal year 2012 and $5.2 million in fiscal year 2011.