INCOME TAXES

The components of the provision for income taxes on income before income taxes and noncontrolling interests are as follows (in thousands):



	Year ended October 31,
	2012			2011		2010
Current:
Federal		$48,461			$38,002		$29,180
State	7,516			4,008		4,659
Foreign	1,357			861		1,044
	57,334			42,871		34,883
Deferred	(2,834		)	29		1,817
Total income tax expense		$54,500			$42,900		$36,700

A reconciliation of the federal statutory income tax rate to the Company’s effective tax rate is as follows:



	Year ended October 31,
	2012		2011		2010
Federal statutory income tax rate	35.0	%	35.0	%	35.0	%
State taxes, less applicable federal income tax reduction	3.1		1.8		3.2
Net tax benefit on noncontrolling interests’ share of income	(1.7	)	(2.5	)	(2.6	)
Net tax benefit on qualified research and development activities	(1.7	)	(2.7	)	(1.0	)
Net tax benefit on qualified domestic production activities	(1.3	)	(1.0	)	(.8	)
Other, net	.4		.4		(.1	)
Effective tax rate	33.8	%	31.0	%	33.7	%

Deferred income taxes reflect the net tax 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 Company believes that it is more likely than not that it will generate sufficient future taxable income to utilize all of its deferred tax assets and has therefore not recorded a valuation allowance on any such asset. Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):



	As of October 31,
	2012			2011
Deferred tax assets:
Inventories		$18,536			$15,581
Deferred compensation liability	15,805			11,708
Foreign R&D carryforward and credit	3,432			3,277
Stock option compensation	3,151			1,947
Bonus accrual	2,671			2,373
Customer rebates accrual	2,029			616
Capital lease obligations	1,412			1,354
Vacation accrual	1,288			877
Warranty reserve	871			793
Allowance for doubtful accounts receivable	778			973
Other	2,119			2,986
Total deferred tax assets	52,092			42,485

Deferred tax liabilities:
Goodwill and other intangible assets	(102,829		)	(68,601		)
Property, plant and equipment	(8,950		)	(7,069		)
Other	(712		)	(1,054		)
Total deferred tax liabilities	(112,491		)	(76,724		)
Net deferred tax liability		($60,399	)		($34,239	)

The net deferred tax liability is classified in the Company’s Consolidated Balance Sheets as follows (in thousands):



	As of October 31,
	2012			2011
Current asset		$27,545			$22,286
Long-term asset	2,492			2,374
Long-term liability	(90,436		)	(58,899		)
Net deferred tax liability		($60,399	)		($34,239	)

The increase in the Company’s net deferred tax liability from $34.2 million as of October 31, 2011 to $60.4 million as of October 31, 2012 is principally related to the net deferred tax liabilities recognized in connection with the acquisition of Switchcraft (see Note 2, Acquisitions).

As of October 31, 2012 and 2011, the Company’s liability for gross unrecognized tax benefits related to uncertain tax positions was $2.5 million and $1.8 million, respectively, of which $1.7 million and $1.5 million, respectively, would decrease the Company’s income tax expense and effective income tax rate if the tax benefits were recognized. A reconciliation of the activity related to the liability for gross unrecognized tax benefits during the fiscal years ended October 31, 2012 and 2011 is as follows (in thousands):



	Year ended October 31,
	2012			2011
Balances as of beginning of year		$1,834			$2,306
Increases related to prior year tax positions	1,281			50
Decreases related to prior year tax positions	(240		)	(482		)
Increases related to current year tax positions	299			393
Settlements	(52		)	(56		)
Lapse of statutes of limitations	(595		)	(377		)
Balances as of end of year		$2,527			$1,834

The Company’s net liability for unrecognized tax benefits was $2.3 million as of October 31, 2012, including $.4 million of interest and $.3 million of penalties and net of $1.0 million in deferred tax assets. During the fiscal year ended October 31, 2012, the Company accrued interest of $.2 million and penalties of $.2 million related to the unrecognized tax benefits noted above. The increases related to prior year tax positions recognized in fiscal 2012 pertain to state income tax positions regarding nexus and state apportionment.

During the third quarter of fiscal 2012, the Company filed its fiscal 2011 U.S. federal and state tax returns and recognized an aggregate benefit, which increased net income attributable to HEICO by $.9 million, from higher fiscal 2011 research and development tax credits. The higher research and development tax credits reflect the finalization of a study of qualifying fiscal 2011 research and development activities and a reduction in the liability for gross unrecognized research and development related tax positions due to a lapse of the statute of limitations.

During the third quarter of fiscal 2011, the Company filed its fiscal 2010 U.S. federal and state tax returns and amended certain prior year state tax returns and recognized an aggregate benefit, which increased net income attributable to HEICO by $2.0 million, principally from state income apportionment updates ($.9 million) and higher research and development tax credits ($.9 million).

The Company's effective tax rate increased to 33.8% for fiscal 2012 from 31.0% for fiscal 2011. The change in the effective tax rate is partially attributed to the retroactive extension of Section 41 of the Internal Revenue Code, “Credit for Increasing Research Activities,” to cover the period from January 1, 2010 to December 31, 2011, which resulted in the recognition of an income tax credit for qualified research and development activities for the last ten months of fiscal 2010 in the first quarter of fiscal 2011 and reduced the recognition of such income tax credit to just the first two months of qualifying research and development activities in fiscal 2012. In addition, the Company purchased certain noncontrolling interests during fiscal 2011 and 2012 that contributed to the comparative increase in the effective tax rate for fiscal 2012. Further, the increase also reflects a higher effective state income tax rate principally because the prior year includes the aforementioned benefit from state income apportionment updates recognized upon the filing of the Company's fiscal 2010 state tax returns and the amendment of certain prior year state tax returns in the third quarter of fiscal 2011 and the current year includes the effect of a fiscal 2012 acquisition and changes in certain state tax laws which impacted state apportionment factors.

The Company files income tax returns in the United States (“U.S.”) federal jurisdiction and in multiple state jurisdictions. The Company is also subject to income taxes in certain jurisdictions outside the U.S., none of which are individually material to the accompanying consolidated financial statements. Generally, the Company is no longer subject to U.S. federal or state examinations by tax authorities for fiscal years prior to 2009.

The total amount of unrecognized tax benefits can change due to audit settlements, tax examination activities, lapse of applicable statutes of limitations and the recognition and measurement criteria under the guidance related to accounting for uncertainty in income taxes. The Company is unable to estimate what this change could be within the next twelve months, but does not believe it would be material to its consolidated financial statements.