NOTE 11—Income Taxes
The U.S. and foreign components of the Company’s income before provision for income taxes consisted of the following (in thousands):
| February 28, 2013 |
February 29, 2012 |
February 28, 2011 |
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U.S. |
$ | 130,560 | $ | 147,148 | $ | 109,044 | ||||||
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Foreign |
79,192 | 60,861 | 44,650 | |||||||||
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Income before provision for income taxes |
$ | 209,752 | $ | 208,009 | $ | 153,694 | ||||||
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The components of the Company’s provision for income taxes consisted of the following (in thousands):
| February 28, 2013 |
February 29, 2012 |
February 28, 2011 |
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Current: |
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Foreign |
$ | 16,556 | $ | 16,612 | $ | 7,675 | ||||||
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Federal |
33,598 | 18,609 | 14,553 | |||||||||
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State |
1,882 | 3,069 | 760 | |||||||||
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Current tax expense |
$ | 52,036 | $ | 38,290 | $ | 22,988 | ||||||
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Deferred: |
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Foreign |
2,899 | (4,390 | ) | 3,037 | ||||||||
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Federal |
9,687 | 27,483 | 16,810 | |||||||||
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State |
(5,074 | ) | — | 3,581 | ||||||||
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Deferred tax expense |
$ | 7,512 | $ | 23,093 | $ | 23,428 | ||||||
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Net provision for income taxes |
$ | 59,548 | $ | 61,383 | $ | 46,416 | ||||||
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Significant components of the Company’s deferred tax assets and liabilities at February 28, 2013 and February 29, 2012, consisted of the following (in thousands):
| February 28, 2013 |
February 29, 2012 |
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Deferred tax assets: |
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Foreign net operating loss carryforwards |
$ | 7,629 | $ | 9,464 | ||||
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Domestic net operating loss carryforwards |
12,227 | 5,251 | ||||||
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Domestic credit carryforwards |
29,062 | 31,548 | ||||||
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Goodwill |
— | 7,265 | ||||||
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Share-based compensation |
26,781 | 21,147 | ||||||
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Deferred revenue |
43,066 | 34,684 | ||||||
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Foreign deferred royalty expenses |
6,000 | 5,753 | ||||||
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Other |
8,299 | 9,524 | ||||||
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Total deferred tax assets |
$ | 133,064 | $ | 124,636 | ||||
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Valuation allowance for deferred tax assets |
(659 | ) | (3,641 | ) | ||||
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Total deferred tax assets, net of valuation allowance |
$ | 132,405 | $ | 120,995 | ||||
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Deferred tax liabilities: |
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Goodwill |
2,971 | — | ||||||
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Fixed and intangible assets |
23,905 | 25,607 | ||||||
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Compensation accruals |
9,124 | 8,695 | ||||||
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Other |
8,132 | 3,325 | ||||||
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Total deferred tax liabilities |
$ | 44,132 | $ | 37,627 | ||||
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Net deferred tax asset |
$ | 88,273 | $ | 83,368 | ||||
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The Company’s gross and net deferred tax asset and liability positions at February 28, 2013 are as follows (in thousands):
| Domestic | Foreign | Consolidated | ||||||||||
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Deferred tax assets: |
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Current |
83,661 | 6,069 | 89,730 | |||||||||
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Non-current |
1,146 | 5,229 | 6,375 | |||||||||
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Deferred tax liabilities: |
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Current |
509 | 456 | 965 | |||||||||
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Non-current |
6,864 | 3 | 6,867 | |||||||||
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Net deferred tax asset |
77,434 | 10,839 | 88,273 | |||||||||
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Net current deferred tax asset |
83,152 | 5,613 | 88,765 | |||||||||
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Net non-current deferred tax asset, recorded in Other assets, net |
— | 5,226 | 5,226 | |||||||||
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Net non-current deferred tax liability, recorded in Other long-term obligations |
(5,718 | ) | — | (5,718 | ) | |||||||
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Net deferred tax asset |
77,434 | 10,839 | 88,273 | |||||||||
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As of February 28, 2013, the Company continues to maintain a valuation allowance against its deferred tax assets with respect to certain foreign and state NOLs. For the year ended February 28, 2013, the valuation allowance decreased by $3.0 million primarily as a result of utilization of foreign NOLs.
As of February 28, 2013, the Company had U.S. federal NOL carryforwards of $24.5 million and state NOL carryforwards of $119.5 million, of which $53.4 million consists of share-based compensation deductions in excess of the amounts expensed in the Company’s operating results. The resulting excess tax benefit will be recognized as an increase to additional paid in capital when realized. The NOL carryforwards expire in varying amounts beginning in the fiscal year ending February 28, 2014. As of February 28, 2013, the Company had U.S. research tax credit carryforwards of $48.6 million which expire in varying amounts beginning in the fiscal year ending February 28, 2014.
Taxes computed at the statutory federal income tax rates are reconciled to the provision for income taxes for the years ended February 28, 2013, February 29, 2012 and February 28, 2011, respectively, as follows (in thousands):
| February 28, 2013 |
February 29, 2012 |
February 28, 2011 |
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Effective rate |
28.4 | % | 29.5 | % | 30.2 | % | ||||||
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Provision at federal statutory rate, 35% |
$ | 73,413 | $ | 72,803 | $ | 53,834 | ||||||
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State tax, net of federal tax benefit (1) |
907 | 3,070 | 4,341 | |||||||||
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Foreign rate differential |
(7,034 | ) | (7,631 | ) | (5,280 | ) | ||||||
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Israel tax holiday (2) |
(1,806 | ) | (1,447 | ) | (2,671 | ) | ||||||
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Deemed foreign dividend |
5,787 | 3,721 | 5,348 | |||||||||
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Nondeductible items |
2,141 | 2,923 | 5,625 | |||||||||
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Research tax credit |
(5,348 | ) | (2,357 | ) | (3,690 | ) | ||||||
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Foreign tax credit |
(7,852 | ) | (10,830 | ) | (11,357 | ) | ||||||
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Other |
(660 | ) | 1,131 | 266 | ||||||||
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Provision for income taxes |
$ | 59,548 | $ | 61,383 | $ | 46,416 | ||||||
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| (1) | The Company amended its state income tax returns for prior years, which resulted in a reduction of state tax, net of federal tax benefit, of $3.4 million. |
| (2) | The Company qualifies for a tax holiday in Israel which began during the fiscal year ended February 28, 2011 and is scheduled to terminate as of the fiscal year ending February 29, 2020. The tax holiday provides for an exemption from income tax in the first two years, and for a reduced rate of taxation on income generated in Israel for the subsequent eight years. The financial impact of this holiday for the year ended February 28, 2013 was a $1.8 million reduction in the Company’s provision for income taxes, which increased the Company’s diluted earnings per share by $0.01. |
The Company has not provided U.S. deferred taxes on the cumulative earnings of foreign subsidiaries that have been reinvested outside the U.S. indefinitely; these earnings were $200.5 million at February 28, 2013. Determination of the deferred tax liability, if any, on these earnings reinvested indefinitely outside the U.S. is not practicable because of available foreign tax credits. It is the Company’s policy to invest the earnings of foreign subsidiaries indefinitely outside the U.S. From time to time, however, the Company may remit a portion of these earnings to the extent it does not incur additional U.S. tax and it is otherwise feasible. The Company has provided U.S. income taxes on the earnings of certain foreign subsidiaries that are not considered as permanently reinvested outside the U.S. The U.S. income tax on such earnings is completely offset by U.S. foreign tax credits.
Unrecognized tax benefits
The following table reconciles unrecognized tax benefits for the three years ended February 28, 2013 (in thousands):
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Balance at February 28, 2010 |
$ | 43,374 | ||
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Additions based on tax positions related to the current year |
3,782 | |||
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Additions based on tax positions related to prior years |
2,292 | |||
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Reductions related to change in effective tax rate |
(7,365 | ) | ||
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Balance at February 28, 2011 |
$ | 42,083 | ||
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Additions based on tax positions related to the current year |
2,066 | |||
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Additions based on tax positions related to prior years |
531 | |||
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Reductions related to settlements with tax authorities |
(259 | ) | ||
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Reductions related to changes in facts and circumstances |
(659 | ) | ||
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Balance at February 29, 2012 |
$ | 43,762 | ||
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Additions based on tax positions related to prior years |
2,122 | |||
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Additions based on tax positions related to the current year |
2,576 | |||
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Reductions related to changes in facts and circumstances |
(147 | ) | ||
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Balance at February 28, 2013 |
$ | 48,313 | ||
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The Company’s unrecognized tax benefits as February 28, 2013 and February 29, 2012, which, if recognized, would affect the Company’s effective tax rate were $45.3 million and $39.9 million, respectively.
It is the Company’s policy to recognize interest and penalties related to uncertain tax positions as income tax expense. Accrued interest and penalties related to unrecognized tax benefits totaled $4.2 million and $3.5 million as of February 28, 2013 and February 29, 2012, respectively.
The results and timing of the resolution of tax audits is highly uncertain and the Company is unable to estimate the range of the possible changes to the balance of unrecognized tax benefits. However, the Company does not anticipate that within the next 12 months that the total amount of unrecognized tax benefits will significantly increase or decrease as a result of any such potential tax audit resolutions.
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. The following table summarizes the tax years in the Company’s major tax jurisdictions that remain subject to income tax examinations by tax authorities as of February 28, 2013. Due to NOL carryforwards, in some cases the tax years continue to remain subject to examination with respect to such NOLs:
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Tax Jurisdiction |
Years Subject
to Income Tax Examination |
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U.S. federal |
1994 – Present | |||
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North Carolina |
1999 – Present | |||
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Ireland |
2008 – Present | |||
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Japan (1) |
2012 – Present | |||
| (1) | The Company has been examined for income tax for years through February 28, 2011. A tax examination was concluded in fiscal 2012 with no significant adjustments resulting. However, the statute of limitations remains open for five years. |
The Company is currently undergoing an income tax examination by the U.S. Internal Revenue Service with respect to its fiscal year ended February 28, 2010. The Company is also currently undergoing an income tax examination in India.
The Company believes it has adequately provided for any reasonably foreseeable outcomes related to tax audits.