Income Taxes

12 Months Ended

Dec. 31, 2012

Income Taxes [Abstract]

INCOME TAXES

(7) INCOME TAXES

Earnings (loss) before income taxes relate to the following jurisdictions (in thousands):

	Years Ended December 31,
	2012		2011			2010
United States	$	3,158	$	(3,182	)	$	(3,189	)
Foreign		3,531		7,290			8,324
	$	6,689	$	4,108		$	5,135

The provision for income taxes consists of the following (in thousands):

	Years Ended December 31,
	2012			2011			2010
Current:
Federal	$	78		$	—		$	—
State		(30	)		79			30
Foreign		2,048			3,364			3,206
		2,096			3,443			3,236
Deferred:
Federal		—			(1,603	)		(514	)
State		—			(133	)		—
Foreign		(799	)		(415	)		(840	)
		(799	)		(2,151	)		(1,354	)
Total	$	1,297		$	1,292		$	1,882

The significant differences between the U.S. federal statutory tax rate of 34% and the Company’s effective income tax expense for earnings (in thousands) are as follows:

	Years Ended December 31,
	2012			2011			2010
Statutory federal income tax rate	$	2,274		$	1,397		$	1,746
State income taxes, net of federal effect		24			(130	)		577
Change in deferred tax asset valuation allowance		(1,883	)		(1,910	)		(3,254	)
Foreign taxes in excess of U.S. statutory rate		486			1,481			2,407
Compensation deduction limitation		265			360			448
Other, net		131			94			(42	)
	$	1,297		$	1,292		$	1,882

The tax effects of temporary differences and carry-forwards that give rise to deferred tax assets and liabilities consist of the following (in thousands):

	December 31,
	2012		2011
Deferred income tax assets:
Accounts payable and accrued expenses	$	2,088	$	1,770
Accrued payroll and related expenses		3,902		2,998
Stock-based compensation expense		9,221		8,700
Depreciation of property and equipment		3,746		3,861
Non-compete agreements		27		50
Operating loss carry-forwards of foreign subsidiary		1,501		1,422
Federal operating loss carry-forwards		27,494		26,332
Intangible assets		6,195		11,935
State operating loss carry-forwards		2,648		2,625
Other		3,243		3,630
Gross deferred tax assets		60,065		63,323
Less valuation allowance		48,489		51,630
Gross deferred tax assets net of valuation allowance		11,576		11,693
Deferred income tax liabilities:
Intangible assets		5,790		7,405
Unbilled receivables and refund liabilities		2,538		1,781
Capitalized software		969		974
Other		675		679
Gross deferred tax liabilities		9,972		10,839
Net deferred tax assets	$	1,604	$	854

Our reported effective tax rates on earnings approximated 19.4% in 2012, 31.5% in 2011 and 36.7% in 2010. Reported income tax expense in each year primarily results from taxes on the income of foreign subsidiaries. The effective tax rates generally are less than the expected tax rate primarily due to reductions of the Company’s deferred tax asset valuation allowance.

We reduce our deferred tax assets by a valuation allowance if it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are deductible. In making this determination, we consider all available positive and negative evidence affecting specific deferred tax assets, including our past and anticipated future performance, the reversal of deferred tax liabilities, the length of carry-back and carry-forward periods and the implementation of tax planning strategies.

Objective positive evidence is necessary to support a conclusion that a valuation allowance is not needed for all or a portion of deferred tax assets when significant negative evidence exists. Cumulative tax losses in recent years are the most compelling form of negative evidence considered by management in this determination. As of December 31, 2012, management determined that based on all available evidence, a valuation allowance of $48.5 million is appropriate, representing a decrease of $3.1 million from the valuation allowance of $51.6 million recorded as of December 31, 2011.

As of December 31, 2012, we had approximately $78.6 million of U.S. federal loss carry-forwards available to reduce future U.S. federal taxable income. The U.S. federal loss carry-forwards expire through 2032. As of December 31, 2012, we had approximately $91.3 million of state loss carry-forwards available to reduce future state taxable income. The state loss carry-forwards expire to varying degrees between 2017 and 2032 and are subject to certain limitations.

Generally, we have not provided deferred taxes on the undistributed earnings of international subsidiaries as we consider these earnings to be permanently reinvested. However, in 2011, we determined that the earnings of our Canadian subsidiary should no longer be considered to be permanently reinvested. This change resulted in earnings of $4.8 million that we anticipated we would repatriate, and we provided additional deferred taxes of $0.2 million in 2011 relating to this potential repatriation, representing the estimated withholding tax liability to be due when such amounts are repatriated. In 2012, our Canadian subsidiary generated $4.3 million of earnings that we anticipated would be repatriated at some future date, and we provided additional deferred taxes of $0.2 million in 2012 relating to this potential repatriation, which represents the estimated withholding tax liability due if such amounts are repatriated. We did not provide additional incremental U.S. income tax expense on these amounts as the Canadian subsidiary is classified as a branch for U.S. income tax purposes.

On March 17, 2006, the Company experienced an ownership change as defined under Section 382 of the Internal Revenue Code (“IRC”). This ownership change resulted in an annual IRC Section 382 limitation that limits the use of certain tax attribute carry-forwards. Of the $78.6 million of U.S. federal loss carry-forwards available to the Company, $17.8 million of the loss carry-forwards are subject to an annual usage limitation of $1.4 million.

We currently are in the process of determining if we experienced an ownership change subsequent to March 17, 2006, but have not yet completed this analysis. Based on preliminary calculations we have made with the assistance of external advisors, we believe that any additional limitations on the usage of our loss carry-forwards that would be imposed if an additional ownership change has occurred would be minimal. We do not believe that an additional ownership change would have a material adverse impact on our financial position, results of operations or cash flows.

We apply a “more-likely-than-not” recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We refer to GAAP for guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Our policy for recording potential interest and penalties associated with uncertain tax positions is to record such items as a component of earnings before income taxes.

We recorded unrecognized tax benefits of $2.2 million as of December 31, 2012, a decrease of $0.4 million over the $2.6 million recorded at December 31, 2011. We recorded accrued interest and penalties of $1.4 million as of December 31, 2012, a decrease of $0.8 million over the $2.2 million recorded at December 31, 2011. We recognized a reduction of interest expense of $0.8 million in 2012 and additions to interest expense of $0.4 million in 2011 related to the liability for unrecognized tax benefits. The decreases in the unrecognized tax benefits and the related accrued interest and penalties in 2012 occurred for several reasons, including the expiration of the statute of limitations for certain of these taxes in several states and in two foreign jurisdictions, completion of an audit by a foreign jurisdiction that resulted in a lower tax assessment than we had estimated, and the imposition of limitations on our potential liability resulting from our beginning the voluntary disclosure agreement process with one state. Due to the complexity of the tax rules underlying these unrecognized tax benefits, and the unclear timing of tax audits, tax agency determinations, and other events, we cannot establish reasonably reliable estimates for the periods in which the cash settlement of these liabilities will occur.

We file U.S., state, and foreign income tax returns in jurisdictions with varying statutes of limitations. As of December 31, 2012, the 2009 through 2011 tax years generally remain subject to examination by federal and most state and foreign tax authorities. The use of net operating losses generated in tax years prior to 2009 may also subject returns for those years to examination.