Income Taxes

12 Months Ended

Sep. 30, 2012

Income Taxes

Income Taxes

7.     Income Taxes

        The income before income taxes, by geographic area, was as follows:

	Fiscal Year Ended
	September 30, 2012		October 2, 2011		October 3, 2010
	(in thousands)
Income before income taxes:
United States	$	141,035	$	126,912	$	119,729
Foreign		19,761		13,580		3,358
Total income before income taxes	$	160,796	$	140,492	$	123,087

        Income tax expense consisted of the following:

	Fiscal Year Ended
	September 30, 2012			October 2, 2011			October 3, 2010
	(in thousands)
Current:
Federal	$	46,058		$	30,246		$	28,538
State		6,949			5,948			5,489
Foreign		8,569			9,596			600
Total current income tax expense		61,576			45,790			34,627
Deferred:
Federal		(200	)		6,755			9,978
State		(622	)		1,069			1,951
Foreign		(4,690	)		(6,104	)		(288	)
Total deferred income tax expense (benefit)		(5,512	)		1,720			11,641
Total income tax expense	$	56,064		$	47,510		$	46,268

        Total income tax expense was different from the amount computed by applying the U.S. federal statutory rate to pre-tax income as follows:

	Fiscal Year Ended
	September 30, 2012					October 2, 2011					October 3, 2010
	($ in thousands)
Tax at federal statutory rate	$	56,278		35.0	%	$	49,172		35.0	%	$	43,080		35.0	%
State taxes, net of federal benefit		4,932		3.1			4,376		3.1			4,787		3.9
R&E credits		(360	)	(0.2	)		(1,689	)	(1.2	)		(400	)	(0.3	)
Domestic production deduction		(774	)	(0.5	)		(770	)	(0.6	)		(714	)	(0.6	)
Tax differential on foreign earnings		(4,444	)	(2.8	)		(4,140	)	(3.0	)		(863	)	(0.7	)
Contingent consideration adjustments		(1,552	)	(1.0	)		–		–			–		–
Valuation allowance		2,512		1.6			–		–			786		0.6
Other		(528	)	(0.3	)		561		0.5			(408	)	(0.3	)
Total income tax expense	$	56,064		34.9	%	$	47,510		33.8	%	$	46,268		37.6	%

        Our fiscal year 2012 effective tax rate was 34.9% compared to 33.8% for fiscal 2011. The higher effective tax rate resulted primarily from the non-extension of R&E credits subsequent to December 31, 2011. The R&E credits expired on December 31, 2011 for federal purposes but California R&E credits are still available. We are currently under examination by the IRS for the fiscal years 2005 through 2009, and by the California Franchise Tax Board for fiscal years 2004 through 2005, with respect to R&E credits. With a few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for fiscal years before 2004.

        Temporary differences comprising the net deferred income tax liability shown on the accompanying consolidated balance sheets were as follows:

	Fiscal Year Ended
	September 30, 2012			October 2, 2011
	(in thousands)
Deferred Tax Asset:
State taxes	$	975		$	765
Reserves and contingent liabilities		4,689			5,271
Allowance for doubtful accounts		2,039			5,876
Accrued liabilities		13,298			16,974
Stock-based compensation		10,980			10,057
Loss carry-forwards		2,926			388
Valuation allowance on loss carry-forwards		(2,512	)		–
Total deferred tax asset		32,395			39,331
Deferred Tax Liability:
Unbilled revenue		(45,417	)		(47,858	)
Prepaid expense		(2,251	)		(3,950	)
Intangibles		(21,695	)		(26,128	)
Cash-to-accrual adjustments		–			(262	)
Property and equipment		(8,109	)		(9,397	)
Total deferred tax liability		(77,472	)		(87,595	)
Net deferred tax liability	$	(45,077	)	$	(48,264	)

        We have performed an assessment of positive and negative evidence regarding the realization of the deferred tax assets at September 30, 2012. This assessment included the evaluation of scheduled reversals of deferred tax liabilities, availability of carry-backs, and estimates of projected future taxable income. Although realization is not assured, based on our assessment, we have concluded that it is more likely than not that the assets will be realized except for the assets related to loss carry-forwards in India for which a valuation allowance of $2.5 million has been provided.

        At September 30, 2012, undistributed earnings of our foreign subsidiaries, primarily in Canada, amounting to approximately $37.0 million are expected to be permanently reinvested. Accordingly, no provision for U.S. income taxes or foreign withholding taxes has been made. Upon distribution of those earnings, we would be subject to U.S. income taxes and foreign withholding taxes. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable; however, the potential foreign tax credit associated with the deferred income would be available to partially reduce the resulting U.S. tax liabilities.

        At September 30, 2012, we had $24.1 million of unrecognized tax benefits. Included in the balance of unrecognized tax benefits at the end of fiscal year 2012 were $18.5 million of tax benefits that, if recognized, would affect our effective tax rate. It is not expected that there will be a significant change in the unrecognized tax benefits in the next 12 months. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

	Fiscal Year Ended
	September 30, 2012			October 2, 2011			October 3, 2010
	(in thousands)
Beginning balance	$	25,940		$	21,806		$	20,530
Additions for current year tax positions		6,273			8,007			6,895
Additions for prior year tax positions		19			2,554			2,720
Reductions for prior year tax positions		(8,072	)		(6,315	)		(5,093	)
Settlements		(68	)		(112	)		(3,246	)
Ending balance	$	24,092		$	25,940		$	21,806

        We recognize potential interest and penalties related to unrecognized tax benefits in income tax expense. The amount of interest expense (net of interest income) accrued at September 30, 2012 and October 2, 2011, was $3.1 million and $3.2 million, respectively.