14. Income Taxes

The provision for income taxes was as follows during fiscal 2011, 2010, and 2009:


	2011			2010			2009
	(In thousands)
Current:
Federal	$	22,019		$	10,190		$	16,704
State		2,873			4,406			4,979
Foreign		(251	)		6,490			15,453

		24,641			21,086			37,136

Deferred:
Federal		59			7,761			(2,317	)
State		(112	)		(644	)		(2,018	)
Foreign		1,305			(356	)		(696	)

		1,252			6,761			(5,031	)

Total provision	$	25,893		$	27,847		$	32,105

The foreign provision was based on foreign pretax earnings of $20.6 million, $25.3 million and $30.8 million in fiscal 2011, 2010, and 2009, respectively. Current foreign tax expense related to foreign tax withholdings was $5.4 million, $2.3 million and $5.0 million in fiscal year 2011, 2010 and 2009, respectively.

Deferred tax assets and liabilities at September 30, 2011 and 2010 were as follows:


	2011			2010
	(In thousands)
Deferred tax assets:
Net operating loss carryforward	$	9,373		$	10,004
Research credit carryforward		1,388			1,028
Capital loss carryforward		21			134
Investments		1,235			1,260
Accrued compensation		1,586			2,176
Share-based compensation		24,489			23,531
Deferred revenue		1,042			2,345
Accrued lease costs		2,526			1,611
Property and equipment		4,239			5,890
Capitalized R&D		—			323
Other		5,988			11,356

		51,887			59,658
Less valuation allowance		(3,422	)		(3,540	)

		48,465			56,118

Deferred tax liabilities:
Intangible assets		(20,541	)		(19,732	)
Prepaid expense		(3,942	)		(4,534	)
Other		(1,040	)		(2,865	)

		(25,523	)		(27,131	)

Deferred tax assets, net	$	22,942		$	28,987

Based upon the level of historical taxable income and projections for future taxable income over the periods that the deferred tax assets will reverse, management believes it is more likely than not that we will realize the benefits of the deferred tax asset, net of the existing valuation allowance at September 30, 2011.

For fiscal 2011, the decrease in the valuation allowance was due to the expiration of a portion of the U.S. capital loss carryforward. The remaining valuation allowance is associated with operations where the company has a net operating loss carryforward where realization remains uncertain.

During fiscal 2011, the change in net operating loss (NOL) was due to utilization of federal NOL. The increase in the research credit carryforward was due to less than expected utilization on the fiscal 2010 tax return. We acquired the following U.S. Federal and state NOL in connection with our acquisition of Braun in fiscal 2005. As of September 30, 2011, we had available U.S. federal, state and foreign NOL carryforwards of approximately $14.6 million, $3.2 million, and $13.6 million, respectively. We also have available excess California state research credit of approximately $1.4 million. The U.S. federal NOL carryforward will expire at various dates beginning in fiscal 2024, if not utilized. The state NOL carryforward will begin to expire in fiscal 2021 through fiscal 2024, if not utilized. Utilization of the U.S. federal and state NOL are subject to an annual limitation due to the “change in ownership” provisions of the Internal Revenue Code of 1986 (the “Code”), as amended, and similar state provisions.

The reconciliation between the U.S. federal statutory income tax rate of 35% and our effective tax rate is shown below for fiscal 2011, 2010 and 2009:


	2011			2010			2009
	(In thousands)
Income tax provision at U.S. federal statutory rate	$	34,117		$	32,306		$	34,150
State income taxes, net of U.S. federal benefit		2,770			2,452			1,383
Foreign taxes		(6,045	)		(4,721	)		(3,469	)
Research credits		(2,559	)		(353	)		(1,950	)
Domestic production deduction		(2,494	)		(1,204	)		(1,421	)
Reduction in valuation allowance		—			—			(148	)
Other		104			(633	)		3,560

Recorded income tax provision	$	25,893		$	27,847		$	32,105

The decrease in our income tax provision in fiscal 2011 compared with fiscal 2010 was largely due to a one-time discrete entry recorded in the recognition of the 2010 extension of the US Federal Research and Development Credit and a manufacturing deduction rate increase. In addition, there was a one-time Foreign Tax Credit benefit related to an intercompany dividend.

Unrecognized Tax Benefit for Uncertain Tax Positions

We conduct business globally and, as a result, file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities. With few exceptions, we are no longer subject to U.S. federal, state, local, or foreign income tax examinations for fiscal years prior to 2008. We are currently under audit by the IRS for tax returns filed for fiscal 2008 and 2009 and by California Franchise Tax Board for fiscal 2006 through 2009. We do not anticipate any adjustments related to those audits that will result in a material change to our financial position.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:


	2011			2010			2009
	(in thousands)
Gross unrecognized tax benefits upon adoption on October 1	$	12,286		$	18,587		$	26,265
Gross increases for tax positions in prior periods		547			—			3,566
Gross decreases for tax positions in prior periods		—			(7,025	)		(2,141	)
Gross increases based on tax positions related to the current year		1,000			724			1,802
Decreases for settlements and payments		(4,294	)		—			(10,905	)
Decreases due to statute expiration		—			—			—

Gross unrecognized tax benefits at September 30	$	9,539		$	12,286		$	18,587

We had $9.5 million of total unrecognized tax benefits as of September 30, 2011. Included in the $9.5 million of total gross unrecognized tax benefits as of September 30, 2011 was $7.9 million of tax benefits that, if recognized, would impact the effective tax rate. The Company expects that approximately $7.1 million of unrecognized tax benefits will settle over the next 12 months.

We recognize interest expense related to unrecognized tax benefits and penalties as part of the provision for income taxes in our consolidated statements of income. We recognize interest earned related to income tax matters as interest income in our consolidated statements of income. As of September 30, 2011, we have accrued interest of $0.8 million related to the unrecognized tax benefits.

Pretax earnings of a non-U.S. subsidiary or affiliate are generally subject to U.S. taxation when repatriated. We reinvest international earnings in our international operations and currently do not have a plan to repatriate those earnings. Accordingly, no provision has been made for the taxes related to any future repatriation of these earnings.