Income Taxes

Income from continuing operations before income taxes is categorized geographically as follows:



	Year Ended December 31,
	2012		2011		2010
	(In thousands)
United States	$	245,745	$	62,287	$	39,454
Foreign	166,950		131,300		55,900
Total income from continuing operations before income taxes	$	412,695	$	193,587	$	95,354

The provision for income taxes consisted of the following:



	Year Ended December 31,
	2012			2011			2010
	(In thousands)
Continuing Operations:
Current (expense) benefit:
Federal	$	(13,553	)	$	(30,325	)	$	91,305
State	(7,960		)	(1,963		)	27,777
Foreign, including foreign witholding tax	(8,498		)	(1,146		)	(8,474		)
	(30,011		)	(33,434		)	110,608
Deferred (expense) benefit:
Federal	(67,700		)	(17,047		)	(103,343		)
State	(6,760		)	(1,501		)	(36,397		)
Foreign	4,261			(3,049		)	3,810
	(70,199		)	(21,597		)	(135,930		)
Total income tax expense from continuing operations	$	(100,210	)	$	(55,031	)	$	(25,322	)
Income tax (expense) benefit from discontinued operations	$	(3,594	)	$	4,422		$	(279,644	)

The difference between income tax expense and the amount resulting from applying the federal statutory rate of 35% to Income from continuing operations before income taxes is attributable to the following:



	Year Ended December 31,
	2012			2011			2010
	(In thousands)
Income tax expense at federal statutory rate	$	(144,443	)	$	(67,755	)	$	(33,373	)
State taxes, net of federal benefit	(10,003		)	(2,280		)	(8,620		)
Differences between statutory rate and foreign effective tax rate	51,780			43,591			19,122
Non-deductible stock-based compensation	(1,509		)	(1,777		)	(2,826		)
Change in valuation allowance	5,760			(350		)	350
Research and experimentation credit	—			1,670			670
Tax expense related to foreign currency gain on distribution of previously taxed income	—			(6,207		)	—
Change in estimated tax expense related to a divested business	—			—			3,365
Accrual for uncertain tax positions	(306		)	(23,265		)	(4,966		)
Other	(1,489		)	1,342			956
	$	(100,210	)	$	(55,031	)	$	(25,322	)

During 2011, we repatriated $86.4 million of funds that had been previously taxed in the U.S. from our foreign subsidiaries, which included the realization of a foreign currency gain of $17.7 million for tax purposes. The Company recorded an income tax expense of $6.2 million related to the foreign currency gain.

During 2010, the Company recorded a $7.8 million income tax expense, reflecting a remeasurement of state deferred tax assets and liabilities using future tax rates which will be in effect when the underlying assets and liabilities will reverse. The change in state tax rate is primarily attributable to the change in the Company’s business operations after the sale of the Authentication Services business.

The tax effects of temporary differences that give rise to significant portions of the Company’s deferred tax assets and liabilities are as follows:



	As of December 31,
	2012			2011
	(In thousands)
Deferred tax assets:
Net operating loss carryforwards	$	34,422		$	20,157
Deductible goodwill and intangible assets	7,761			8,909
Tax credit carryforwards	—			6,213
Deferred revenue, accruals and reserves	87,235			106,234
Capital loss carryforwards and book impairment of investments	3,400			5,749
Other	5,234			4,439
Total deferred tax assets	138,052			151,701
Valuation allowance	(20,815		)	(15,882		)
Net deferred tax assets	117,237			135,819
Deferred tax liabilities:
Property and equipment	(21,522		)	(42		)
Non-deductible acquired intangibles	—			(148		)
Convertible debentures	(424,488		)	(390,125		)
Other	(5,984		)	(3,417		)
Total deferred tax liabilities	(451,994		)	(393,732		)
Total net deferred tax liabilities	$	(334,757	)	$	(257,913	)

With the exception of deferred tax assets related to book and tax bases differences of certain investments and certain foreign net operating loss carryforwards, management believes it is more likely than not that forecasted income, together with the tax effects of the deferred tax liabilities, will be sufficient to fully recover the remaining deferred tax assets. Deferred tax assets at December 31, 2012 include foreign net operating loss carryforwards of $4.7 million and an offsetting valuation allowance of $4.7 million related to prior years that were not included in the balances as of December 31, 2011. The Company’s deferred tax assets related to net operating loss carryforwards increased in 2012 primarily due to a tax rate change, resulting from the expiration of a tax holiday in one of the jurisdictions in Switzerland. This increase in deferred tax assets was partially offset by an increase in the corresponding valuation allowance which resulted from the tax rate change.

As of December 31, 2012, the Company had federal, state and foreign net operating loss carryforwards of approximately $20.4 million, $895.0 million, and $111.4 million, respectively, before applying tax rates for the respective jurisdictions. As of December 31, 2012, the Company had federal and state research tax credits of $37.3 million and $1.3 million, respectively, and alternative minimum tax credits of $10.4 million available for future years. Certain net operating loss carryforwards and credits are subject to an annual limitation under Internal Revenue Code Section 382, but are expected to be fully realized. In future periods, an aggregate, tax effected amount of $81.7 million will be recorded to Additional paid-in capital when carried forward excess tax benefits from stock-based compensation are utilized to reduce future cash tax payments. The federal and state net operating loss and federal tax credit carryforwards expire in various years from 2013 through 2030. The majority of the foreign net operating loss carryforwards will expire in 2015 through 2017.

On January 2, 2013, the President signed into law, the American Taxpayer Relief Act of 2012 (“Act”). Under this Act the federal research and development credit was retroactively extended for amounts paid or incurred after December 31, 2011 through December 31, 2013. The effects of the change in the tax law will be recognized in our first quarter of fiscal 2013, which is the quarter that the law was enacted.

The deferred tax liability related to the Convertible Debentures is driven by the excess of the tax deduction taken for interest expense over the amount of interest expense recognized in the consolidated financial statements. The interest expense deducted for tax purposes is based on the adjusted issue price of the Convertible Debentures, while the interest expense recognized in accordance with GAAP is based only on the liability portion of the Convertible Debentures. The adjusted issue price of the Convertible Debentures grows over the term due to the difference between the interest deduction taken for income tax, using a comparable yield of 8.5%, and the coupon rate of 3.25%, compounded annually.

Deferred income taxes have not been provided on the undistributed earnings of foreign subsidiaries. The amount of such earnings as of December 31, 2012 was $693.1 million. These earnings have been indefinitely reinvested and the Company does not plan to initiate any action that would precipitate the payment of income taxes thereon. It is not practicable to estimate the amount of additional tax that might be payable on the undistributed foreign earnings.

The Company qualifies for a tax holiday in Switzerland until 2015 which provides reduced rates of taxation on certain types of income and also requires certain thresholds of investment and employment. Another tax holiday specific to one of the jurisdictions in Switzerland expired on December 31, 2011, increasing the tax rate from 12.7% to 25.5%. In India, the Company’s exemption related to the Software Technology Park of India (“STPI”) tax program expired on March 31, 2011. Following the expiration, the Company is subject to the regular statutory tax rate of 33% in India. These tax holidays increased the Company’s earnings per share by $0.11 in 2012, $0.06 in 2011, and $0.12 in 2010.

The Company maintains liabilities for uncertain tax positions. These liabilities involve considerable judgment and estimation and are continuously monitored by management based on the best information available including changes in tax regulations and other information. A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:



	As of December 31,
	2012		2011
	(In thousands)
Gross unrecognized tax benefits at January 1	$	55,933	$	28,757
Increases in tax positions for prior years	420		41
Decreases in tax positions for prior years	—		(1,685		)
Increases in tax positions for current year	240		29,242
Lapse in statute of limitations	—		(422		)
Gross unrecognized tax benefits at December 31	$	56,593	$	55,933

As of December 31, 2012, approximately $46.4 million of unrecognized tax benefits, including penalties and interest, could affect the Company’s tax provision and effective tax rate. The gross unrecognized tax benefit amount is not expected to materially change in the next 12 months.

In accordance with its accounting policy, the Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of tax expense. These accruals were not material in any period presented.

The Company’s major taxing jurisdictions are the U.S., the state of Virginia, and Switzerland. The Company’s tax returns are not currently under examination by these taxing jurisdictions. Because the Company uses historic net operating loss carryforwards and other tax attributes to offset its taxable income in current and future years’ income tax returns for the U.S. and Virginia, such attributes can be adjusted by these taxing authorities until the statute closes on the year in which such attributes were utilized. The open years in Switzerland are the 2009 tax year and forward.