Income Taxes

The United States and international components of income before income taxes are as follows (in thousands):



	Years Ended September 30,
	2014		2013		2012
United States	$	492,577	$	431,833	$	421,346
International	4,765		6,259		10,868
	$	497,342	$	438,092	$	432,214

The provision for income taxes (benefit) consists of the following (in thousands):



	Years Ended September 30,
	2014			2013			2012
Current
U.S. federal	$	164,994		$	138,372		$	147,774
State	15,462			14,322			10,733
Foreign	13,287			6,633			4,218
Total	193,743			159,327			162,725
Deferred
U.S. federal	(5,778		)	1,310			(7,320		)
State	(83		)	(203		)	187
Foreign	(1,723		)	344			1,436
Total	(7,584		)	1,451			(5,697		)
	$	186,159		$	160,778		$	157,028

The effective tax rate differs from the U.S. federal statutory rate as follows (in thousands):



	Years Ended September 30,
	2014			2013			2012
Income tax provision at statutory rate	$	174,070		$	153,332		$	151,275
State taxes, net of federal benefit	12,901			10,944			8,733
Foreign operations	5,050			4,786			1,850
Research and development and other credits	(6,397		)	(10,649		)	(3,537		)
Domestic manufacturing deduction	(15,514		)	(14,047		)	(12,539		)
Stock-based and other compensation	14,583			15,286			10,501
Other	1,466			1,126			745
	$	186,159		$	160,778		$	157,028

The tax effects of the temporary differences that give rise to the deferred tax assets and liabilities are as follows (in thousands):



	Years Ended September 30,
	2014			2013
Deferred tax assets
Net operating loss carry-forwards	$	8,245		$	10,072
Allowance for doubtful accounts	1,724			1,112
Accrued compensation and benefits	8,273			7,272
Inventories and related reserves	1,139			1,120
Stock-based compensation	7,295			5,933
Deferred revenue	30,662			26,277
Other accruals and reserves	13,473			10,131
Tax credit carryforwards	2,852			2,122
Depreciation	738			—
	74,401			64,039
Valuation allowance	(7,198		)	(5,390		)
	67,203			58,649
Deferred tax liabilities
Purchased intangibles and other	(24,108		)	(21,567		)
Depreciation	—			(3,697		)
	(24,108		)	(25,264		)

Net deferred tax assets	$	43,095		$	33,385

At September 30, 2014, the Company had foreign net operating loss carry-forwards of approximately $27.0 million that can be carried forward indefinitely. In addition, there are $8.7 million of federal net operating loss carryforwards, the annual utilization of which is limited under Internal Revenue Code Section 382, and will expire in fiscal years 2033 and 2034. Management believes that it is more likely than not that the benefit from certain foreign net operating loss carryforwards and state tax carryforwards will not be realized. In recognition of this risk, the Company has provided a valuation allowance on the deferred tax assets relating to these carryforwards. The net change in the total valuation allowance was an increase of $1.8 million and $5.2 million for the years ended September 30, 2014 and 2013, respectively.

United States income and foreign withholding taxes have not been provided on approximately $27.6 million of undistributed earnings from the Company’s international subsidiaries. The Company has not recognized a deferred tax liability for the undistributed earnings of its foreign subsidiaries because the Company currently does not expect to remit those earnings in the foreseeable future. Determination of the amount of unrecognized deferred tax liability related to undistributed earnings of foreign subsidiaries is not practicable because such liability, if any, is dependent on circumstances existing if and when remittance occurs.

The Company recognizes the financial statement impact of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest impact that has a greater than fifty percent likelihood of being realized upon ultimate settlement with the relevant tax authority.

The following table provides a reconciliation of the beginning and ending amount of unrecognized tax benefits in fiscal years 2014, 2013 and 2012:



	2014			2013			2012
Balance, beginning of period	$	7,302		$	5,452		$	5,952
Gross increases related to prior period tax positions	901			1,231			79
Gross decreases related to prior period tax positions	(224		)	(142		)	(280		)
Gross increases related to current period tax positions	1,081			1,957			702
Decreases relating to settlements with tax authorities	(2,589		)	—			(3		)
Reductions due to lapses of statute of limitations	(77		)	(1,196		)	(998		)
Balance, end of period	$	6,394		$	7,302		$	5,452

The Company recognizes interest and, if applicable, penalties (not included in the “unrecognized tax benefits” table above) for any uncertain tax positions. Interest and penalties are recorded as a component of income tax expense. In the years ended September 30, 2014, 2013 and 2012 the Company recorded approximately $5,000, $244,000 and $250,000, respectively, of interest and penalty expense related to uncertain tax positions. As of September 30, 2014 and 2013, the Company had a cumulative balance of accrued interest and penalties on unrecognized tax positions of $436,000 and $431,000, respectively.

All unrecognized tax benefits, if recognized, would affect the effective tax rate. There is a reasonable possibility that the Company’s unrecognized tax benefits will change within twelve months due to audit settlements or the expiration of statute of limitations, but the Company does not expect the change to be material to the consolidated financial statements.

The Company and its subsidiaries are subject to U.S. federal income tax as well as the income tax of multiple state and foreign jurisdictions. The Company has concluded all U.S. federal income tax matters for fiscal years through September 30, 2011. The Company is currently under audit by various states for fiscal years 2009 through 2013. Major jurisdictions where there are wholly owned subsidiaries of F5 Networks, Inc. which require income tax filings include the United Kingdom, Japan, Singapore, and Australia. The earliest periods open for review by local taxing authorities are fiscal years 2012 for the United Kingdom, 2007 for Japan, 2008 for Singapore, and 2010 for Australia. Within the next four fiscal quarters, the statute of limitations will begin to close on the fiscal years 2009, 2010 and 2011 state income tax returns.