Income Taxes

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



	Year Ended November 30,
	2013		2012		2011
United States	$	22,211	$	33,056	$	51,159
International	88,397		122,258		98,776
	$	110,608	$	155,314	$	149,935

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



	Year Ended November 30,
	2013			2012			2011
Federal:
Current	$	24,829		$	29,554		$	14,619
Deferred	(13,809		)	(12,231		)	2,364
	11,020			17,323			16,983
State:
Current	865			1,078			1,925
Deferred	(53		)	(2,345		)	1,341
	812			(1,267		)	3,266
Foreign:
Current	17,103			22,919			19,490
Deferred	(2,535		)	(5,775		)	(2,439		)
	14,568			17,144			17,051
Provision for income taxes	$	26,400		$	33,200		$	37,300

The Company recorded an out-of-period adjustment during the fiscal year ended November 30, 2013 to reflect the correction of an immaterial error related to a tax benefit of $2.2 million that was not recorded during the fiscal year ended November 30, 2012.

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,
	2013		2012		2011
U.S. Federal statutory rate	35.0	%	35.0	%	35.0	%
State taxes	(1.4	)	(2.2	)	1.8
Research and development credits	(5.8	)	(1.3	)	(2.7	)
Stock option compensation	0.5		(2.1	)	1.6
Foreign income taxed at different rate	(4.3	)	(7.5	)	(5.9	)
Change in valuation allowance	—		—		(2.5	)
Domestic manufacturing incentives	(1.6	)	(1.4	)	(1.1	)
Other	1.4		0.9		(1.3	)
Effective tax rate	23.8	%	21.4	%	24.9	%

U.S. income taxes and foreign withholding taxes have not been provided for on a cumulative total of $331.9 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,
	2013			2012
Deferred tax assets:
Net operating loss carryforwards	$	65,814		$	62,616
Reserves, accruals and foreign related items	13,680			13,204
Credit carryforwards	21,685			18,534
Depreciation and amortization	10,073			10,073
Deferred revenue	6,247			8,746
Translation gains/losses	2,849			5,673
Stock-based compensation	31,866			28,690
Other	556			94
	152,770			147,630
Deferred tax liabilities:
Intangible assets	(26,206		)	(37,590		)
Convertible debt	(21,680		)	(26,573		)
Other	(485		)	(884		)
	(48,371		)	(65,047		)
Net deferred tax assets before valuation allowance	104,399			82,583
Net deferred tax assets	$	104,399		$	82,583

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. The available positive evidence at November 30, 2013 included historical operating profits and a projection of future income.

As of November 30, 2013, we believed that the amount of the deferred tax assets recorded on our balance sheet would ultimately be realized. However, should there be a change in our ability to realize 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 realize 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, 2013, our federal and state net operating loss carryforwards were $318.7 million and $152.1 million, respectively, which expire through 2032 and 2033, respectively. Of these federal and state net operating losses, $123.8 million and $109.2 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, 2013, our federal and state tax credit carryforwards were $88.3 million and $40.7 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, $82.4 million and $26.4 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 $14.3 million and $24.6 million for fiscal years 2013 and 2012, 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, 2013, 2012, and 2011 are as follows (in thousands):



	November 30,
	2013			2012			2011
Gross unrecognized tax benefits balance at beginning of year	$	54,516		$	43,619		$	35,782
Increases for tax positions of current fiscal year	27,784			8,136			8,449
Increases for tax positions of prior fiscal years	7,245			4,031			962
Lapse of statutes of limitation	(1,708		)	(1,270		)	(1,574		)
Gross unrecognized tax benefits at end of year	87,837			54,516			43,619
Interest and penalties	1,895			881			761
Total unrecognized tax benefits balance at end of year	$	89,732		$	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 2013, the amount of gross unrecognized tax benefits increased by approximately $34.3 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 $89.7 million as of November 30, 2013, of which $73.5 million would affect the effective tax rate if realized. Due to the uncertainty of tax audit outcomes and the timing of tax audit settlements, we are unable to estimate the changes to our unrecognized tax benefits over the next twelve months.

We are subject to routine corporate income tax audits in the United States, India, Netherlands, Sweden, United Kingdom, and other foreign jurisdictions. The statute of limitations for our fiscal years 1994 through 2013 remains open for U.S. purposes. The statute of limitation for our fiscal years 2007 through 2013 remains open for the major foreign tax jurisdictions. Most foreign jurisdictions have statute of limitations that range from three to six years.