Provision for Income Taxes

6 Months Ended

May 31, 2011

Provision for Income Taxes

Provision for Income Taxes

14. PROVISION FOR INCOME TAXES

The effective tax rate was approximately 22% and 17% for the three months ended May 31, 2011 and 2010, respectively, and approximately 18% and 23% for the six months ended May 31, 2011 and 2010, respectively.

The company recognized a $3.2 million tax benefit primarily related to lapses of statutes of limitations and reinstatement of federal research and development credit in the three months ended February 28, 2011.

The company recognized a $2.3 million tax benefit primarily related to the expiration of a statute of limitation in the United Kingdom in the three and six months ended May 31, 2010.

The provision for the six-month periods ended May 31, 2011 and 2010 reflects a forecasted annual tax rate of 26% and 33%, respectively, offset by discrete items which are booked in the period they occur. The forecasted tax rate reflects the benefits resulting from the reorganization of certain foreign entities, lower foreign taxes, release of the valuation allowance on certain domestic assets, domestic manufacturing incentives, and federal and state research and development credits, partially offset by the impact of certain stock compensation charges and state income taxes.

In February 2009, the California 2009-2010 budget legislation was signed into law. One of the major components of this legislation is the ability to elect to apply a single sales factor apportionment for years beginning after January 1, 2011. As a result of our anticipated election of the single sales factor, we are required to re-measure our deferred taxes taking into account the reversal pattern and the expected California tax rate under the elective single sales factor. We have determined that by electing a single sales factor apportionment, our California deferred tax assets will decrease by approximately $1.1 million (net of federal benefit). The tax impact of $1.1 million has been recorded as a discrete item in the first quarter of fiscal year 2009. We continue to estimate the reversal of the noncurrent deferred tax assets and liabilities at the anticipated tax rate for fiscal year 2012.

In connection with the acquisition of Loyalty Lab in the first quarter of fiscal year 2011, we have recorded current deferred tax assets of $0.1 million and long term deferred tax assets of $3.3 million with a corresponding adjustment to goodwill. These deferred taxes were primarily related to the acquired intangible assets, deferred revenue and accrued expenses.

In connection with the acquisition of Kabira in the second quarter of fiscal year 2010, we have recorded current deferred tax assets of $1.4 million and long term deferred tax liabilities of $1.1 million with a corresponding adjustment to goodwill. These deferred taxes were primarily related to the acquired intangible assets, deferred revenue and accrued expenses.

In connection with the acquisition of Netrics in the second quarter of fiscal year 2010, we have recorded current deferred tax assets of $0.2 million and long term deferred tax assets of $0.4 million with a corresponding adjustment to goodwill. These deferred taxes were primarily related to the acquired intangible assets, deferred revenue, accounts receivable, accrued expenses and certain tax attributes of Netrics.

In connection with the acquisition of Foresight in the first quarter of fiscal year 2010, we have recorded current deferred tax liabilities of $1.6 million and long term deferred tax liabilities of $6.5 million with a corresponding adjustment to goodwill. These deferred taxes were primarily related to the acquired intangible assets, deferred revenue and accrued expenses.

During the second quarter of fiscal year 2011, the amount of gross unrecognized tax benefits was decreased by approximately $0.1 million for current period exposures offset by the expiration of certain statutes of limitations. The total amount of gross unrecognized tax benefits was $38.1 million as of May 31, 2011, of which $18.4 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 twelve months.

Upon adoption of the accounting for uncertainty in income taxes, we have elected to include interest expense and penalties accrued on unrecognized tax benefits as a component of our income tax expense. This is consistent with our policy prior to the adoption of the accounting for uncertainty in income taxes. As of November 30, 2010, we had accrued $0.9 million for interest and penalties. There was not a material change to the amount of accrued interest and penalties during the second quarter of fiscal year 2011.

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 2010 remains open for U.S. purposes. Most foreign jurisdictions have statutes of limitations that range from three to six years.

We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes.

As part of the process of preparing our Condensed Consolidated Financial Statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our current tax exposure under the most recent tax laws and assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. The temporary differences mostly relate to stock based compensation charges, amortization of intangible assets, fixed assets depreciation, deferred revenue recognition and other items. We estimate these temporary differences on a quarterly basis which result in movements in deferred tax assets and liabilities, which are included in our Condensed Consolidated Balance Sheets.

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. Upon distribution of these earnings in the form of dividends or otherwise, we will be subject to U.S. income taxes to the extent that available net operating loss carryovers and foreign tax credits are not sufficient to eliminate the additional tax liability.