8. Income Taxes

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

	Fiscal Year Ended

	September 29, 2013			September 30, 2012		October 2, 2011
	(in thousands)
Income (loss) before income taxes:
United States	$	60,547		$	141,035	$	126,912
Foreign		(48,015	)		19,761		13,580

Total income before income taxes	$	12,532		$	160,796	$	140,492

Income tax expense consisted of the following:

	Fiscal Year Ended

	September 29, 2013			September 30, 2012			October 2, 2011
	(in thousands)
Current:
Federal	$	11,155		$	46,058		$	30,246
State		2,705			6,949			5,948
Foreign		11,646			8,569			9,596

Total current income tax expense		25,506			61,576			45,790

Deferred:
Federal		(2,965	)		(200	)		6,755
State		(637	)		(622	)		1,069
Foreign		(7,866	)		(4,690	)		(6,104	)

Total deferred income tax expense (benefit)		(11,468	)		(5,512	)		1,720

Total income tax expense	$	14,038		$	56,064		$	47,510

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 29, 2013					September 30, 2012					October 2, 2011
	($ in thousands)
Tax at federal statutory rate	$	4,386		35.0	%	$	56,278		35.0	%	$	49,172		35.0	%
State taxes, net of federal benefit		1,316		10.5			4,932		3.1			4,376		3.1
R&E credits		(6,622	)	(52.8	)		(360	)	(0.2	)		(1,689	)	(1.2	)
Domestic production deduction		(828	)	(6.6	)		(774	)	(0.5	)		(770	)	(0.6	)
Tax differential on foreign earnings		(4,263	)	(34.0	)		(4,444	)	(2.8	)		(4,140	)	(3.0	)
Corrections of prior-year errors		3,255		26.0			–		–			–		-
Goodwill and contingent consideration		11,288		90.0			(1,552	)	(1.0	)		–		-
Stock compensation		443		3.5			80		0.1			301		0.2
Valuation allowance		4,947		39.5			2,512		1.6			-		-
Other		116		0.9			(608	)	(0.4	)		260		0.3

Total income tax expense	$	14,038		112.0	%	$	56,064		34.9	%	$	47,510		33.8	%

Our fiscal year 2013 effective tax rate was 112.0% compared to 34.9% for fiscal 2012. The higher effective tax rate resulted primarily from impairment charges and valuation allowance. We are currently under examination by the Internal Revenue Service 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. We are also subject to various other state audits. 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 29, 2013			September 30, 2012
	(in thousands)
Deferred Tax Asset:
State taxes	$	452		$	975
Reserves and contingent liabilities		5,883			4,689
Allowance for doubtful accounts		7,345			2,039
Accrued liabilities		14,425			13,298
Stock-based compensation		10,778			10,980
Loss carry-forwards		9,563			2,926
Valuation allowance on loss carry-forwards		(7,459	)		(2,512	)

Total deferred tax asset		40,987			32,395

Deferred Tax Liability:
Unbilled revenue		(47,281	)		(45,417	)
Prepaid expense		(7,522	)		(2,251	)
Intangibles		(24,933	)		(21,695	)
Property and equipment		(9,946	)		(8,109	)

Total deferred tax liability		(89,682	)		(77,472	)

Net deferred tax liability	$	(48,695	)	$	(45,077	)

We have performed an assessment of positive and negative evidence regarding the realization of the deferred tax assets at September 29, 2013. 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 foreign jurisdictions for which a valuation allowance of $7.5 million has been provided.

At September 29, 2013, undistributed earnings of our foreign subsidiaries, primarily in Canada, amounting to approximately $23.5 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 29, 2013, we had $25.9 million of unrecognized tax benefits. Included in the balance of unrecognized tax benefits at the end of fiscal year 2013 were $24.1 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 29, 2013			September 30, 2012			October 2, 2011
	(in thousands)
Beginning balance	$	24,092		$	25,940		$	21,806
Additions for current year tax positions		2,661			6,273			8,007
Additions for prior year tax positions		4,951			19			2,554
Reductions for prior year tax positions		(5,818	)		(8,072	)		(6,315	)
Settlements		–			(68	)		(112	)

Ending balance	$	25,886		$	24,092		$	25,940

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 29, 2013 and September 30, 2012, was $2.3 million and $3.1 million, respectively.