Income Taxes

Income before provision for income taxes consisted of the following (in thousands):



	Year Ended November 30,
	2012		2011		2010
United States	$	33,056	$	51,159	$	84,671
International	122,258		98,776		26,201
	$	155,314	$	149,935	$	110,872

Significant components of the provision for (benefit from) income taxes are as follows (in thousands):



	Year Ended November 30,
	2012			2011			2010
Federal:
Current	$	29,554		$	14,619		$	25,140
Deferred	(12,231		)	2,364			(1,353		)
	17,323			16,983			23,787
State:
Current	1,078			1,925			3,425
Deferred	(2,345		)	1,341			(1,155		)
	(1,267		)	3,266			2,270
Foreign:
Current	22,919			19,490			12,314
Deferred	(5,775		)	(2,439		)	(5,970		)
	17,144			17,051			6,344
Provision for income taxes	$	33,200		$	37,300		$	32,401

The provision for income taxes was at rates other than the United States Federal statutory tax rate for the following reasons:



	Year Ended November 30,
	2012		2011		2010
U.S. Federal statutory rate	35.0	%	35.0	%	35.0	%
State taxes	(2.2	)	1.8		2.1
Research and development credits	(1.3	)	(2.7	)	(0.3	)
Stock option compensation	(2.1	)	1.6		0.5
Foreign income taxed at different rate	(7.5	)	(5.9	)	(7.9	)
Change in valuation allowance	—		(2.5	)	—
Domestic manufacturing incentives	(1.4	)	(1.1	)	—
Other	0.9		(1.3	)	(0.2	)
Effective tax rate	21.4	%	24.9	%	29.2	%

U.S. income taxes and foreign withholding taxes have not been provided for on a cumulative total of $256.4 million of undistributed earnings for certain non-U.S. subsidiaries. With the exception of our subsidiaries in the United Kingdom and Japan, net undistributed earnings of our foreign subsidiaries are generally considered to be indefinitely reinvested, and accordingly, no provision for U.S. income taxes has been provided thereon. We have sufficient cash reserves in the U.S. and do not intend to repatriate any of our foreign earnings. We intend to use the undistributed foreign earnings for acquisitions, local operations expansion and to meet local working capital needs. Upon distribution of these earnings in the form of dividends or otherwise, we will be subject to U.S. income taxes net of available foreign tax credits associated with these earnings. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practicable at this time.

The components of deferred tax assets (liabilities) are as follows (in thousands):



	November 30,
	2012			2011
Deferred tax assets:
Net operating loss carryforwards	$	62,616		$	46,375
Reserves, accruals and foreign related items	13,204			19,409
Credit carryforwards	18,534			14,930
Depreciation and amortization	10,073			12,760
Unrealized losses on investments	—			5,043
Deferred revenue	8,746			6,231
Translation gains/losses	5,673			6,772
Stock compensation expense	28,690			19,727
Other	94			1,374
	147,630			132,621
Deferred tax liabilities:
Intangible assets	(37,590		)	(28,390		)
Convertible debt	(26,573		)	—
Unbilled receivable	—			(4,407		)
Other	(884		)	(2,453		)
	(65,047		)	(35,250		)
Net deferred tax assets before valuation allowance	82,583			97,371
Valuation allowance	—			(5,592		)
Net deferred tax assets	$	82,583		$	91,779

We assess the likelihood that we will be able to recover our deferred tax assets. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. If it is not more likely than not that we expect to recover our deferred tax assets, we will increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. The available positive evidence at November 30, 2012 included historical operating profits and a projection of future income. The valuation allowance decreased by $5.6 million due to the statute of limitations having lapsed with respect to certain capital loss carryforward deferred tax assets. As of November 30, 2012, it was considered more likely than not that our deferred tax assets would be realized with their respective carryforward periods.

As of November 30, 2012, we believed that the amount of the deferred tax assets recorded on our balance sheet would ultimately be recovered. However, should there be a change in our ability to recover our deferred tax assets, our tax provision would increase in the period in which we determine that it is more likely than not that we cannot recover our deferred tax assets.

We have elected to track the portion of our federal and state net operating loss and tax credit carryforwards attributable to excess stock option benefits in a separate memo account. Therefore, these amounts are no longer included in our gross or net deferred tax assets. As of November 30, 2012, our federal and state net operating loss carryforwards for tax return purposes were $332.0 million and $168.0 million, respectively, which expire through 2032. Of these federal and state net operating losses, $152.5 million and $124.7 million, respectively, will be credited directly to additional paid-in capital when our net operating losses attributable to excess stock option deductions are utilized and reduce taxes payable. As of November 30, 2012, our federal and state tax credit carryforwards for tax return purposes were $82.4 million and $38.7 million, respectively. The federal tax credit carryforwards expire in 2032 and the state tax credit can be carried forward indefinitely. Of these federal and state tax credits, $77.3 million and $25.1 million, respectively, will be credited directly to additional paid-in capital when our credits attributable to excess stock option deductions reduce taxes payable.

Our income taxes payable for federal purposes have been reduced by the tax benefits associated with the exercise of employee stock options during the fiscal year and utilization of net operating loss carryover and credits applicable to both stock options and acquired entities. The benefits applicable to stock options were credited directly to stockholders’ equity when realized and amounted to $24.6 million and $8.6 million for fiscal years 2012 and 2011, respectively.

In the event of a change in ownership, as defined under federal and state tax laws, our net operating loss and tax credit carryforwards may be subject to annual limitations. The annual limitations may result in the expiration of the net operating loss and tax credit carryforwards before utilization.

A reconciliation of the unrecognized tax benefits for the fiscal years ended November 30, 2012 and 2011 are as follows (in thousands):



	November 30,
	2012			2011
Gross unrecognized tax benefits balance at beginning of year	$	43,619		$	35,782
Increases for tax positions of current fiscal year	8,136			8,449
Increases for tax positions of prior fiscal years	4,031			962
Lapse of statutes of limitation	(1,270		)	(1,574		)
Gross unrecognized tax benefits at end of year	54,516			43,619
Interest and penalties	881			761
Total unrecognized tax benefits balance at end of year	$	55,397		$	44,380

We account for uncertain tax issues pursuant to authoritative guidance based on a two-step approach to recognize and measure uncertain tax positions taken or expected to be taken in a tax return. The first step is to determine if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained upon audit, whether or not under audit, including contemplated resolution of any related appeals or litigation processes. If the first step is met, then the second step is to measure the tax benefit as the largest amount that is more than 50% likely to be sustained upon ultimate settlement. We adjust reserves for our uncertain tax positions due to changing facts and circumstances, such as the closing of a tax audit, or refinement of estimates due to new information. To the extent that the final outcome of these matters is different than the amounts recorded, such differences will impact our tax provision in our Consolidated Statements of Operations in the period in which such determination is made.

During fiscal year 2012, the amount of gross unrecognized tax benefits increased by approximately $10.9 million. We have elected to include interest expense and penalties accrued on unrecognized tax benefits as a component of our income tax expense. The total amount of gross unrecognized tax benefits was $55.4 million as of November 30, 2012, of which $37.9 million would affect the effective tax rate if realized. We do not expect any significant changes to the amount of unrecognized tax benefit within the next 12 months.

We are subject to routine corporate income tax audits in the United States and foreign jurisdictions. The statute of limitations for our fiscal years 1994 through 2012 remains open for U.S. purposes. Most foreign jurisdictions have statute of limitations that range from three to six years.