INCOME TAXES

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



Fiscal Years	2013		2012		2011
(in thousands)
Income before taxes:
United States	$	78,271	$	72,025	$	40,259
Foreign	174,593		157,399		127,195
Total	$	252,864	$	229,424	$	167,454



Provision for taxes:
US Federal:
Current	$	38,543		$	33,689		$	21,157
Deferred	(8,708		)	(1,930		)	(9,351		)
	29,835			31,759			11,806
US State:
Current	6,939			4,273			5,169
Deferred	(790		)	(1,280		)	(3,370		)
	6,149			2,993			1,799
Foreign:
Current	17,636			19,470			17,278
Deferred	(18,922		)	(14,514		)	(12,338		)
	(1,286		)	4,956			4,940
Income tax provision	$	34,698		$	39,708		$	18,545
Effective tax rate	14		%	17		%	11		%

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	2013		2012		2011
Statutory federal income tax rate	35	%	35	%	35	%
Increase (reduction) in tax rate resulting from:
Foreign income taxed at lower rates	(20	)%	(19	)%	(22	)%
US State income taxes	2	%	1	%	1	%
US Federal and California research and development credits	(3	)%	—	%	(3	)%
Stock option compensation	1	%	1	%	1	%
Settlement with tax authorities	—	%	—	%	(1	)%
Foreign tax rate change	(2	)%	—	%	(1	)%
Other	1	%	(1	)%	1	%
Effective tax rate	14	%	17	%	11	%

On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law. Under this act, the federal research and development credit was retroactively extended for amounts paid or incurred after December 31, 2011 and before January 1, 2014. The effect of the retroactive reinstatement of the 2012 credit was recognized in the first quarter of 2013, the quarter in which the law was enacted. On December 30, 2013, Finland reduced its corporate income tax rate from 24.5% to 20% effective as of the beginning of 2014 resulting in a tax benefit in the fourth quarter of fiscal 2013.

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	2013			2012
(in thousands)
Deferred tax liabilities:
Purchased intangibles	$	152,437		$	171,238
Depreciation and amortization	9,008			8,712
US residual tax on foreign earnings	10,464			973
Other	458			631
Total deferred tax liabilities	172,367			181,554

Deferred tax assets:
Inventory valuation differences	8,792			10,917
Expenses not currently deductible	25,086			27,107
Deferred revenue	2,884			2,838
US state credit carryforwards	14,125			13,495
Warranty	3,142			3,135
US Federal net operating loss carryforwards	3,660			5,951
Foreign net operating loss carryforwards	35,388			25,053
Stock-based compensation	15,704			13,000
Other	2,665			2,251
Total deferred tax assets	111,446			103,747
Valuation allowance	(31,944		)	(22,137		)
Total deferred tax assets	79,502			81,610

Total net deferred tax liabilities	$	(92,865	)	$	(99,944	)

Reported as:
Current deferred income tax assets	$	38,597		$	43,473
Non-current deferred income tax assets	5,553			4,927
Current deferred income tax liabilities	(616		)	(84		)
Non-current deferred income tax liabilities	(136,399		)	(148,260		)
Net deferred tax liabilities	$	(92,865	)	$	(99,944	)

At the end of fiscal 2013, the Company has federal, California and foreign net operating loss carryforwards, or NOLs, of approximately $10.1 million, $0.3 million, and $144.8 million, respectively. The federal and California NOLs expire in years 2020 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 $16.3 million that can be carried forward indefinitely.

The Company’s valuation allowance is primarily attributable to foreign net operating losses and state 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 2013, the Company’s foreign subsidiary accumulated undistributed earnings that are intended to be indefinitely reinvested outside the U.S. were approximately $509.8 million. The amount of the unrecognized deferred tax liability on this amount is approximately $164.9 million.

The total amount of the unrecognized tax benefits (UTB) at the end of fiscal 2013 was $44.1 million. A reconciliation of unrecognized tax benefit is as follows:



At the End of Fiscal Year	2013			2012			2011
(in thousands)
Beginning balance	$	32,250		$	25,984		$	25,473
Increase related to prior years tax positions	1,777			—			706
Increase related to current year tax positions	11,976			11,604			7,313
Lapse of statute of limitations	(1,896		)	(1,801		)	(2,862		)
Settlement with taxing authorities	—			(3,537		)	(4,646		)
Ending balance	$	44,107		$	32,250		$	25,984

The Company's total unrecognized tax benefits that, if recognized, would affect its effective tax rate were $38.1 million and $26.9 million at the end of fiscal 2013 and 2012.

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. State income tax matters have been concluded for years through 2005 and non-U.S. income tax matters have been concluded for years through 2002. 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. At the end of fiscal 2013 and 2012, the Company had accrued $3.6 million and $2.7 million for payment of interest and penalties.