18. Income Taxes

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


	Year Ended November 30,
	2011		2010		2009
United States	$	51,159	$	84,671	$	78,928
International		98,776		26,201		10,689

	$	149,935	$	110,872	$	89,617

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


	Year Ended November 30,
	2011			2010			2009
Federal:
Current	$	14,619		$	25,140		$	23,547
Deferred		2,364			(1,353	)		(992	)

		16,983			23,787			22,555

State:
Current		1,925			3,425			2,934
Deferred		1,341			(1,155	)		(1,050	)

		3,266			2,270			1,884

Foreign:
Current		19,490			12,314			13,246
Deferred		(2,439	)		(5,970	)		(10,588	)

		17,051			6,344			2,658

Provision for income taxes	$	37,300		$	32,401		$	27,097

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,
	2011			2010			2009
U.S. Federal statutory rate		35.0	%		35.0	%		35.0	%
State taxes		1.8			2.1			3.2
Research and development credits		(2.7	)		(0.3	)		(1.9	)
Stock option compensation		1.6			0.5			1.1
Foreign income taxed at different rate		(5.9	)		(7.9	)		(6.6	)
Change in valuation allowance		(2.5	)		0.0			0.8
Domestic manufacturing incentives		(1.1	)		—			—
Other		(1.3	)		(0.2	)		(1.4	)

Effective tax rate		24.9	%		29.2	%		30.2	%

U.S. income taxes and foreign withholding taxes have not been provided for on a cumulative total of $142.5 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 require repatriation of our foreign earnings. We intend to use the undistributed earnings for acquisitions, local operations expansion and to meet local operating expense requirements. 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.

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


	November 30,
	2011			2010
Deferred tax assets:
Net operating loss carryforwards	$	46,375		$	38,822
Reserves, accruals and foreign related items		19,409			26,319
Credit carryforwards		14,930			18,123
Depreciation and amortization		12,760			18,424
Unrealized losses on investments		5,043			4,905
Deferred revenue		6,231			8,337
Translation gains/losses		6,772			6,030
Stock compensation expense		19,727			13,629
Other		1,374			3,170

		132,621			137,759
Deferred tax liabilities:
Intangible assets		(28,390	)		(34,790	)
Unbilled receivable		(4,407	)		(720	)
Other		(2,453	)		(745	)

		(35,250	)		(36,255	)

Net deferred tax assets before valuation allowance		97,371			101,504
Valuation allowance		(5,592	)		(8,051	)

Net deferred tax assets	$	91,779		$	93,453

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 will 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, 2011 included recent cumulative profit in all jurisdictions. The valuation allowance decreased by $2.5 million due to utilization of foreign tax credit in the current fiscal year. As of November 30, 2011, it was considered more likely than not that our deferred tax assets would be realized with the exception of certain capital loss carryovers as we cannot forecast sufficient future capital gains to realize the deferred tax assets. The valuation allowance of approximately $5.6 million as of November 30, 2011 will result in an income tax benefit if and when we conclude it is more likely than not that the related deferred tax assets will be realized.

As of November 30, 2011, 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 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, 2011, our federal and state net operating loss carryforwards for tax return purposes were $271.8 million and $233.9 million, respectively, which expire through 2030. Of these federal and state net operating losses, $149.1 million and $136.9 million, respectively, will be credited directly to additional paid-in capital when our net operating losses attributable to stock deductions reduce taxes payable. As of November 30, 2011, our federal and state tax credit carryforwards for tax return purposes were $75.7 million and $36.9 million, respectively. The federal tax credit carryforwards expire in 2031 and the state tax credit can be carried forward indefinitely. Of these federal and state tax credits, $73.0 million and $26.6 million, respectively, will be credited directly to additional paid-in capital when our credits attributable to stock 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 $8.5 million and $30.6 million for fiscal years 2011 and 2010, 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, 2011 and 2010 are as follows (in thousands):


	November 30,
	2011			2010
Gross unrecognized tax benefits balance at beginning of year	$	35,782		$	38,516
Increases for tax positions of current fiscal year		8,449			1,267
Increases for tax positions of prior fiscal years		964			413
Decreases for tax positions of prior fiscal years		(2	)		(493	)
Lapse of statutes of limitation		(1,574	)		(3,921	)

Gross unrecognized tax benefits at end of year		43,619			35,782
Interest and penalties		761			872

Total unrecognized tax benefits balance at end of year	$	44,380		$	36,654

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 on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized 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. 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 2011, the amount of gross unrecognized tax benefits increased by approximately $7.7 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 $44.4 million as of November 30, 2011, of which $24.8 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 2011 remains open for U.S. purposes. Most foreign jurisdictions have statute of limitations that range from three to six years.