INCOME TAXES

12 Months Ended

Sep. 30, 2011

INCOME TAXES

INCOME TAXES

NOTE 11—INCOME TAXES

Significant components of the provision for income taxes are as follows:

Years ended September 30,	2011		2010			2009
	(in thousands)
Current:
Federal	$	1,726	$	16,362		$	11,417
State	1,036		4,611			3,691
Foreign	19,436		15,268			11,090
Total current	22,198		36,241			26,198
Deferred:
Federal	8,582		268			2,516
State	960		69			420
Foreign	829		(1,293		)	420
Total deferred provision (benefit)	10,371		(956		)	3,356
Total income tax expense	$	32,569	$	35,285		$	29,554

We calculate deferred tax assets and liabilities based on differences between financial reporting and tax bases of assets and liabilities, and measure them using the enacted tax rates and laws that we expect will be in effect when the differences reverse.

Significant components of our deferred tax assets and liabilities are as follows:

September 30,	2011			2010
	(in thousands)
Deferred tax assets:
Accrued employee benefits	$	9,303		$	9,112
Acquired net operating losses	1,432			—
Long-term contracts and inventory valuation reductions	11,142			9,612
Allowances for loss contingencies	6,894			6,144
Deferred compensation	3,444			3,246
Book over tax depreciation	1,436			1,964
Adjustment to pension liability	15,137			13,204
California research and development credit carryforward	4,363			4,762
Other	3,539			1,919
Subtotal	56,690			49,963
Valuation allowance	(4,363		)	(4,762		)
Deferred tax assets	52,327			45,201
Deferred tax liabilities:
Amortization of goodwill and intangibles	12,113			1,770
Deferred revenue	11,702			—
Prepaid expenses	2,472			2,080
State taxes	800			850
Other	144			4,106
Deferred tax liabilities	27,231			8,806
Net deferred tax asset	$	25,096		$	36,395

In 2011 we obtained approval from the Internal Revenue Service to change our tax accounting method for recording service contract revenue. As a result, deferred tax liabilities increased by $11.7 million in 2011.

The reconciliation of income tax computed at the U.S. federal statutory tax rate to income tax expense is as follows:

Years ended September 30,	2011			2010			2009
	(in thousands)
Tax at federal statutory rate	$	41,176		$	37,072		$	29,834
State income taxes, net of federal tax effect	1,297			3,042			2,672
Nondeductible expenses	480			324			408
Change in reserve accrued for tax contingencies	625			(1,641		)	(777		)
Tax effect from foreign earnings repatriation	—			—			3,063
Tax effect from foreign subsidiaries	(5,347		)	(2,212		)	(2,523		)
Federal R&D credits generated in the current year	(2,696		)	(491		)	(993		)
Reinstatement of federal R&D credit	(1,406		)	—			(794		)
Other	(1,560		)	(809		)	(1,336		)
	$	32,569		$	35,285		$	29,554

We are subject to ongoing audits from various taxing authorities in the jurisdictions in which we do business.  As of September 30, 2011, our open tax years in significant jurisdictions include 2006-2010 in the U.K. and New Zealand and 2008-2010 in the U.S. We believe we have adequately provided for uncertain tax issues we have not yet resolved with federal, state and foreign tax authorities. Although not more likely than not, the most adverse resolution of these issues could result in additional charges to earnings in future periods. Based upon a consideration of all relevant facts and circumstances, we do not believe the ultimate resolution of uncertain tax issues for all open tax periods will have a materially adverse effect upon our results of operations or financial condition.

We have recorded liabilities for unrecognized tax benefits related to permanent and temporary tax adjustments which totaled $4.3 million at September 30, 2011 and $3.2 million at September 30, 2010. The net changes in the liability were as follows:

Years ended September 30,	2011			2010
	(in thousands)
Balance at October 1	$	3,168		$	4,809
Decrease related to tax positions in prior years:
Recognition of benefits from expiration of statutes	(1,172		)	(1,747		)
Tax positions related to the current year	1,797			106
Tax positions related to tax adjustments recorded in our acquistion of Abraxas	484			—
Balance at September 30	$	4,277		$	3,168

At September 30, 2011, the amount of unrecognized tax benefits from permanent tax adjustments that, if recognized, would affect the effective rate was $4.3 million. Over the next year, we do not expect a significant increase or decrease in the unrecognized tax benefits recorded as of September 30, 2011. The amount of net interest and penalties recognized as a component of income tax expense during 2011, 2010 and 2009 was not material.  Interest and penalties accrued at September 30, 2011 and 2010 amounted to $0.2 million and $0.2 million, respectively, bringing the total liability for uncertain tax issues to $4.5 million and $3.4 million as of September 30, 2011 and 2010, respectively.

We made income tax payments, net of refunds, totaling $42.1 million, $30.0 million and $28.8 million in 2011, 2010 and 2009, respectively.

Income before income taxes includes the following components:

Years ended September 30,	2011		2010		2009
	(in thousands)
United States	$	44,955	$	60,451	$	45,329
Foreign	72,692		45,470		39,911
Total	$	117,647	$	105,921	$	85,240

We evaluate our capital requirements in our foreign subsidiaries on an annual basis to determine what level of capital is needed for the long-term operations of the businesses. We provide U.S. taxes on the amount of capital that is determined to be in excess of the long-term requirements of the business and is, therefore, available for distribution. Undistributed earnings of all our foreign subsidiaries amounted to approximately $142.0 million at September 30, 2011. We consider those earnings to be indefinitely reinvested, and accordingly, we have not provided for U.S. federal and state income taxes thereon and have determined that no amounts of undistributed earnings are available for distribution. Upon distribution of those earnings in the form of dividends or otherwise, we would be subject to both U.S. income taxes and withholding taxes payable to the foreign countries, but would also be able to offset unrecognized foreign tax credit carryforwards. It is not practicable for us to determine the total amount of unrecognized deferred U.S. income tax liability because of the complexities associated with its hypothetical calculation.