INCOME TAXES

The components of the provision for income taxes on income before income taxes and noncontrolling interests are as follows (in thousands):



	Year ended October 31,
	2013			2012			2011
Current:
Federal		$49,275			$48,461			$38,002
State	9,060			7,516			4,008
Foreign	3,650			1,357			861
	61,985			57,334			42,871
Deferred	(5,785		)	(2,834		)	29
Total income tax expense		$56,200			$54,500			$42,900

A reconciliation of the federal statutory income tax rate to the Company’s effective tax rate is as follows:



	Year ended October 31,
	2013		2012		2011
Federal statutory income tax rate	35.0	%	35.0	%	35.0	%
State taxes, less applicable federal income tax reduction	3.1		3.1		1.8
Net tax benefit on qualified research and development activities	(2.6	)	(1.7	)	(2.7	)
Net tax benefit on corporate owned life insurance policies	(1.4	)	(0.5	)	(0.1	)
Net tax benefit on noncontrolling interests’ share of income	(1.3	)	(1.7	)	(2.5	)
Net tax benefit on qualified domestic production activities	(1.2	)	(1.3	)	(1.0	)
Other, net	(.5	)	.9		.5
Effective tax rate	31.1	%	33.8	%	31.0	%

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company believes that it is more likely than not that it will generate sufficient future taxable income to utilize all of its deferred tax assets and has therefore not recorded a valuation allowance on any such asset. Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):



	As of October 31,
	2013			2012
Deferred tax assets:
Deferred compensation liability		$22,242			$15,805
Inventories	21,673			18,536
Stock option compensation	5,002			3,151
R&D carryforward and credit	4,045			3,432
Bonus accrual	3,394			2,671
Customer rebates accrual	2,706			2,029
Vacation accrual	1,676			1,288
Capital lease obligations	1,313			1,412
Other	6,645			3,768
Total deferred tax assets	68,696			52,092

Deferred tax liabilities:
Goodwill and other intangible assets	(148,711		)	(102,829		)
Property, plant and equipment	(12,486		)	(8,950		)
Other	(1,154		)	(712		)
Total deferred tax liabilities	(162,351		)	(112,491		)
Net deferred tax liability		($93,655	)		($60,399	)

The net deferred tax liability is classified in the Company’s Consolidated Balance Sheets as follows (in thousands):



	As of October 31,
	2013			2012
Current asset		$33,036			$27,545
Long-term asset	1,791			2,492
Long-term liability	(128,482		)	(90,436		)
Net deferred tax liability		($93,655	)		($60,399	)

The increase in the Company's net deferred tax liability from $60.4 million as of October 31, 2012 to $93.7 million as of October 31, 2013 is principally related to the net deferred tax liabilities recognized in connection with the acquisitions of Reinhold and Lucix (see Note 2, Acquisitions), partially offset by an increase in the deferred tax asset related to a higher deferred compensation liability for the HEICO Corporation Leadership Compensation Plan ("LCP"). The deferred income tax benefit recognized in fiscal 2013 principally reflects the increase in the deferred tax asset related to the higher LCP liability resulting from both increased investment earnings and plan contributions.

As of October 31, 2013 and 2012, the Company’s liability for gross unrecognized tax benefits related to uncertain tax positions was $1.1 million and $2.5 million, respectively, of which $.8 million and $1.7 million, respectively, would decrease the Company’s income tax expense and effective income tax rate if the tax benefits were recognized. A reconciliation of the activity related to the liability for gross unrecognized tax benefits during the fiscal years ended October 31, 2013 and 2012 is as follows (in thousands):



	Year ended October 31,
	2013			2012
Balances as of beginning of year		$2,527			$1,834
Increases related to prior year tax positions	58			1,281
Decreases related to prior year tax positions	(967		)	(240		)
Increases related to current year tax positions	108			299
Settlements	(570		)	(52		)
Lapse of statutes of limitations	(84		)	(595		)
Balances as of end of year		$1,072			$2,527

The decreases related to settlements and prior year tax positions recognized in fiscal 2013 pertain to state income tax positions regarding nexus and state apportionment, respectively, which were originally recognized in fiscal 2012 and resolved through the filing of state income tax returns in fiscal 2013 and the finalization of a state tax audit, respectively.

The Company’s net liability for unrecognized tax benefits was $1.0 million as of October 31, 2013, including $.3 million of interest and penalties and net of $.4 million in deferred tax assets. The Company's net liability for unrecognized tax benefits was $2.3 million as of October 31, 2012, including $.7 million of interest and penalties and net of $1.0 million in deferred tax assets. The Company recognized interest and penalties of ($.2) million, $.4 million and less than $.1 million in fiscal 2013, 2012 and 2011, respectively, related to unrecognized tax benefits.

The Company’s effective tax rate in fiscal 2013 decreased to 31.1% from 33.8% in fiscal 2012. The decrease is partially due to an income tax credit for qualified research and development activities for the last ten months of fiscal 2012 that was recognized in the first quarter of fiscal 2013 pursuant to the retroactive extension of Section 41 of the Internal Revenue Code, "Credit for Increasing Research Activities," in January 2013 to cover a two-year period from January 1, 2012 to December 31, 2013. The decrease in the effective tax rate was also attributed to the benefit from higher tax-exempt unrealized gains in the cash surrender values of life insurance policies related to the LCP and an income tax deduction under Section 404(k) of the Internal Revenue Code for the one-time special and extraordinary cash dividend paid in December 2012 to participants of the HEICO Savings and Investment Plan holding HEICO common stock.

The Company's effective tax rate increased to 33.8% in fiscal 2012 from 31.0% in fiscal 2011. The change in the effective tax rate is partially attributed to the retroactive extension of Section 41 of the Internal Revenue Code, “Credit for Increasing Research Activities,” to cover the period from January 1, 2010 to December 31, 2011, which resulted in the recognition of an income tax credit for qualified research and development activities for the last ten months of fiscal 2010 in the first quarter of fiscal 2011 and reduced the recognition of such income tax credit to just the first two months of qualifying research and development activities in fiscal 2012. In addition, the Company purchased certain noncontrolling interests during fiscal 2011 and 2012 that contributed to the comparative increase in the effective tax rate for fiscal 2012. Further, the increase also reflects a higher effective state income tax rate principally because fiscal 2011 includes the aforementioned benefit from state income apportionment updates recognized upon the filing of the Company's fiscal 2010 state tax returns and the amendment of certain prior year state tax returns in the third quarter of fiscal 2011 and fiscal 2012 includes the effect of a fiscal 2012 acquisition and changes in certain state tax laws which impacted state apportionment factors.

The Company files income tax returns in the United States (“U.S.”) federal jurisdiction and in multiple state jurisdictions. The Company is also subject to income taxes in certain jurisdictions outside the U.S., none of which are individually material to the accompanying consolidated financial statements. Generally, the Company is no longer subject to U.S. federal, state or foreign examinations by tax authorities for years prior to fiscal 2009.

The total amount of unrecognized tax benefits can change due to audit settlements, tax examination activities, lapse of applicable statutes of limitations and the recognition and measurement criteria under the guidance related to accounting for uncertainty in income taxes. The Company is unable to estimate what this change could be within the next twelve months, but does not believe it would be material to its consolidated financial statements.