Note 14. Taxes

Effective Tax Rate

The Company estimates its annual effective tax rate at the end of each fiscal quarter. The Company’s estimate takes into account estimations of annual pre-tax income, the geographic mix of pre-tax income and the Company’s interpretations of tax laws and possible outcomes of audits.

The following table presents the provision for income taxes and the effective tax rates:


	Three Months Ended January 31,
	2014			2013
	(in thousands)
Income before income taxes	$	71,184		$	71,730
Provision for income tax	$	3,488		$	1,808
Effective tax rate		4.9	%		2.5	%

The Company’s effective tax rate for the three months ended January 31, 2014 is lower than the statutory federal income tax rate of 35% primarily due to the lower tax rates applicable to its non-U.S. operations, U.S. federal and California research tax credits, and a settlement with the Internal Revenue Service (IRS) for fiscal 2012, partially offset by state taxes and non-deductible stock compensation.

The Company’s effective tax rate for the three months ended January 31, 2014 as compared to the three months ended January 31, 2013 was higher principally due to the reinstatement of the U.S. federal research tax credit in the first quarter of fiscal 2013 as well as the reversal of deferred taxes resulting from the merger of a foreign affiliate partially offset by tax benefits of settlement with the IRS in the first quarter of fiscal 2014 of the Company’s fiscal 2012 tax filing. The expiration of the U.S. federal research tax credit on December 31, 2013 resulted in only two months of tax credit in fiscal 2014, compared to fiscal 2013 that had an additional tax credit for ten months of fiscal 2012 due to the reinstatement of the tax credit as well as a full year tax credit for fiscal 2013.

The Company’s total gross unrecognized tax benefits at January 31, 2014 are $115.0 million exclusive of interest and penalties. If the total gross unrecognized tax benefits at January 31, 2014 were recognized in the future, approximately $115.0 million would decrease the effective tax rate.

The timing of the resolution of income tax examinations is highly uncertain as well as the amounts and timing of various tax payments that are part of the settlement process. This could cause large fluctuations in the balance sheet classification of current and non-current assets and liabilities. The Company believes that in the coming 12 months, it is reasonably possible that either certain audits will conclude or the statute of limitations on certain state and foreign income and withholding taxes will expire, or both. Given the uncertainty as to ultimate settlement terms, the timing of payment and the impact of such settlements on other uncertain tax positions, the range of the estimated potential decrease in underlying unrecognized tax benefits is between $0 and $36 million.

IRS Examinations

On November 6, 2013, the Company reached final settlement with the IRS on the remaining fiscal 2012 issues and recognized approximately $10 million in unrecognized tax benefits in the first quarter of fiscal 2014.