INCOME TAXES

Income before taxes and the provision for taxes consisted of the following:



Fiscal Years	2012		2011		2010
(in thousands)
Income before taxes:
United States	$	72,025	$	40,259	$	137,426
Foreign	157,399		127,195		3,661
Total	$	229,424	$	167,454	$	141,087



Provision for taxes:
US Federal:
Current	33,689		21,157		40,926
Deferred	(1,930	)	(9,351	)	(3,795	)
	31,759		11,806		37,131
US State:
Current	4,273		5,169		2,496
Deferred	(1,280	)	(3,370	)	505
	2,993		1,799		3,001
Foreign:
Current	19,470		17,278		9,939
Deferred	(14,514	)	(12,338	)	(12,597	)
	4,956		4,940		(2,658	)
Income tax provision	39,708		18,545		37,474
Effective tax rate	17	%	11	%	27	%

The difference between the tax provision at the statutory federal income tax rate and the tax provision as a percentage of income before taxes (effective tax rate) was as follows:



Fiscal Years	2012		2011		2010
Statutory federal income tax rate	35	%	35	%	35	%
Increase (reduction) in tax rate resulting from:
Foreign income taxed at lower rates	(19	)%	(24	)%	(24	)%
US State income taxes	1	%	1	%	2	%
US Federal and California research and development credits	—	%	(3	)%	(3	)%
Stock option compensation	1	%	1	%	3	%
Settlement with tax authorities	—	%	(1	)%	20	%
Release of valuation allowance	—	%	—	%	(6	)%
Other	(1	)%	2	%	—	%
Effective tax rate	17	%	11	%	27	%

The effective tax rate in fiscal 2012 and 2011 is significantly lower as compared to fiscal 2010 due to an IRS settlement in fiscal 2010. The increase of the effective tax rate in 2012 compared to 2011 is primarily due to geographic mix of pretax income and the expiration of federal research and development credit. The Company reinvests a majority of the earnings indefinitely outside of the United States and therefore has not provided U.S. taxes on those indefinitely reinvested earnings.

Deferred income taxes reflect the net 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 significant components of the Company’s deferred tax assets and liabilities are as follows:



At the End of Fiscal Year	2012			2011
(in thousands)
Deferred tax liabilities:
Purchased intangibles	$	170,271		$	138,948
Depreciation and amortization	8,712			12,373
US residual tax on foreign earnings	973			—
Other	631			—
Total deferred tax liabilities	180,587			151,321

Deferred tax assets:
Inventory valuation differences	10,917			9,988
Expenses not currently deductible	27,107			25,738
Deferred revenue	2,838			4,901
US State credit carryforwards	13,495			12,789
Warranty	3,135			3,973
US Federal net operating loss carryforwards	5,951			11,460
Foreign net operating loss carryforwards	25,828			30,752
Net foreign tax credits on undistributed foreign earnings	—			8,589
Stock-based compensation	13,000			15,041
Other	516			3,447
Total deferred tax assets	102,787			126,678
Valuation allowance	(22,144		)	(20,432		)
Total deferred tax assets	80,643			106,246

Total net deferred tax liabilities	$	(99,944	)	$	(45,075	)

Reported as:
Current deferred income tax assets	$	43,473		$	44,632
Non-current deferred income tax assets	4,927			6,062
Current deferred income tax assets	(84		)	(175		)
Non-current deferred income tax assets	(148,260		)	(95,594		)
Net deferred tax liabilities	$	(99,944	)	$	(45,075	)

At the end of fiscal 2012, the Company has federal, California and foreign net operating loss carryforwards, or NOLs, of approximately $15.5 million, $8.0 million, and $94.2 million, respectively. The federal and California NOLs expire in years 2018 through 2032. There is, generally, no expiration for the foreign NOLs. Utilization of the Company’s federal and state NOLs are subject to annual limitations in accordance with the applicable tax code.

The Company has California research and development credit carryforwards of approximately $15.8 million that can be carried forward indefinitely.

The Company’s valuation allowance is primarily attributable to net operating losses and research and development credit carryforwards. The Company has determined that it is more likely than not that the Company will not realize these deferred tax assets and, accordingly, a valuation allowance has been established for such amounts.

At the end of fiscal 2012, the Company’s foreign subsidiary accumulated undistributed earnings that are intended to be indefinitely reinvested outside the U.S. were approximately $306.7 million. The amount of the unrecognized deferred tax liability on this amount is approximately $107.3 million.

The total amount of the unrecognized tax benefits, or UTB, at the end of fiscal 2012 was $35.2 million. A reconciliation of unrecognized tax benefit is as follows:



(in thousands)	Federal, State and Foreign Tax			Accrued Interest and Penalties			Unrecognized Income Tax Benefits
At the end of fiscal 2009	$	38,262		$	5,035		$	43,297
Additions for tax positions related to the current year	4,091			1,372			5,463
Additions for tax positions related to prior year	4,600			—			4,600
Other reductions for tax positions related to prior years	(21,453		)	(3,767		)	(25,220		)
Foreign exchange	(27		)	—			(27		)
At the end of fiscal 2010	$	25,473		$	2,640		28,113
Total UTBs that, if recognized, would impact the effective tax rate at the end of fiscal 2010	$	25,473		$	2,640		$	28,113
Additions for tax positions related to the current year	7,438			1,877			9,315
Additions for tax positions related to prior years	706			62			768
Other reductions for tax positions related to prior years	(7,508		)	(1,831		)	(9,339		)
Foreign exchange	(125		)	(14		)	(139		)
At the end of fiscal 2011	$	25,984		$	2,734		$	28,718
Total UTBs that, if recognized, would impact the effective tax rate at the end of fiscal 2011	$	25,984		$	2,734		$	28,718
Additions for tax positions related to the current year	11,700			833			12,533
Additions for tax positions related to prior year	(96		)	—			(96		)
Other reductions for tax positions related to prior years	(5,338		)	(634		)	(5,972		)
Foreign exchange	—			7			7
At the end of fiscal 2012	$	32,250		$	2,940		35,190
Total UTBs that, if recognized, would impact the effective tax rate at the end of fiscal 2012	$	32,250		$	2,940		$	35,190

The Company and its subsidiaries are subject to U.S. federal, state, and foreign income taxes. The Company has substantially concluded all U.S. federal income tax audits for years through 2009 with the exception of acquired companies. State income tax matters have been concluded for years through 2005 and non-U.S. income tax matters have been concluded for years through 2000. The Company is currently in various stages of multiple year examinations by federal, state, and foreign (multiple jurisdictions) taxing authorities. Although the timing of resolution and/or closure on audits is highly uncertain, the Company does not believe that the unrecognized tax benefits would materially change in the next twelve months.

The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company’s UTB liability including interest and penalties was recorded in Other non-current liabilities in the accompanying Consolidated Balance Sheets.