15.

INCOME TAXES

The components of income (loss) before provision (benefit) for income taxes are as follows for the years ended December 31:


(in thousands)	2012		2011		2010
Domestic	$	20,497	$	1,862	$	(13,695	)
Foreign		10,448		8,951		7,498

Total income (loss) before provision (benefit)	$	30,945	$	10,813	$	(6,197	)

The components of the provision (benefit) for income taxes are as follows for the years ended December 31:


(in thousands)	2012			2011			2010
Current:
Federal	$	12,128		$	11,698		$	(376	)
State		971			1,775			292
Foreign		2,142			2,501			1,352

Total current provision		15,241			15,974			1,268

Deferred:
Federal		(4,759	)		(13,978	)		(4,622	)
State		(870	)		(2,204	)		2,486
Foreign		(535	)		913			562

Total deferred benefit		(6,164	)		(15,269	)		(1,574	)

Total provision (benefit)	$	9,077		$	705		$	(306	)

The effective income tax rate differed from the statutory federal income tax rate due to the following:


	2012			2011			2010
Statutory federal income tax rate		35.0	%		35.0	%		35.0	%
Valuation allowance		(3.0	)		3.0			(37.2	)
Transaction costs		—			—			(10.7	)
State income taxes, net of federal benefit and tax credits		(0.8	)		(4.6	)		7.8
Permanent differences		1.7			5.4			(7.8	)
Domestic production activities		(3.9	)		(13.6	)		—
Federal research and experimentation credits		—			(5.3	)		5.5
Tax effects of foreign activities		(2.7	)		1.7			14.1
Tax-exempt income		(0.1	)		(0.3	)		1.8
Provision to return adjustments		0.6			2.5			1.7
Non-deductible compensation		1.5			3.0			(2.2	)
Provision for uncertain tax positions		2.8			(19.7	)		0.2
Other		(1.8	)		(0.6	)		(3.3	)

Effective income tax rate		29.3	%		6.5	%		4.9	%

Deferred income taxes reflect the tax attributes and 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. Significant components of net deferred tax assets and liabilities are as follows:


(in thousands)	2012			2011
Deferred tax assets:
Net operating loss carryforwards	$	61,248		$	62,918
Accruals and reserves		16,521			14,951
Software revenue		6,529			7,024
Depreciation		4,882			3,635
Tax credit carryforwards		4,914			3,964
Other		(31	)		5

Total deferred tax assets		94,063			92,497
Less valuation allowances		(12,128	)		(13,057	)

Net deferred tax assets	$	81,935		$	79,440

Deferred tax liabilities:
Intangibles	$	(22,441	)		(26,328	)

Total deferred tax liabilities		(22,441	)		(26,328	)

Net deferred income taxes	$	59,494		$	53,112

Reported as:
Current deferred tax asset	$	10,202		$	9,826
Long-term deferred income tax assets		49,292			43,286

Total deferred income taxes	$	59,494		$	53,112

In 2010, the Company recognized approximately $174 million of federal net operating losses (“NOLs”) and approximately $6 million of foreign NOLs from the Chordiant acquisition. The Company determined that it may utilize approximately $150.8 million of acquired Chordiant federal and foreign NOLs after application of applicable tax limitations impacting the annual use of the NOLs. A valuation allowance is recorded on the deferred tax assets in excess of the NOL that is recoverable as a result of these limitations. The Company also recorded approximately $2.5 million of deferred tax assets related to acquired Chordiant state NOLs.

As of December 31, 2012, the Company had approximately $139 million of federal NOLs, of which $113.2 million are available for use subject to annual limitations through 2029. As of December 31, 2012 the Company has $1.3 million of deferred tax asset related to state NOLs.

The Company records a valuation allowance for deferred tax assets when it is more-likely-than-not that the Company will not realize the entire benefit of the assets. This determination requires significant judgment, including assumptions about future taxable income that are based on historical and projected information. The $0.9 million net decrease in the valuation allowance during 2012 primarily relates to the release of a $1.1 million valuation allowance previously recorded against NOLs as a result of the expiration of their applicable statute, partially offset by a $0.2 million valuation allowance recorded against certain state tax credits generated during the year. The $0.3 million increase in the valuation allowance during 2011 relates to a valuation allowance recorded against certain state tax credits generated during the year and certain capital losses that the Company will not be able to utilize.

As of December 31, 2012, the Company had available $6.9 million of state tax research and experimentation (“R&E”) credits and $0.5 million of investment tax credits expiring in the years 2013 through 2027.

The Company’s India subsidiary is a development center in an area designated as a Special Economic Zone (“SEZ”), and is entitled to a tax holiday in India. The tax holiday reduces or eliminates income tax in that country and expires in 2022. For the years ended December 31, 2012, 2011, and 2010, the effect of the income tax holiday was to reduce the overall income tax provision by approximately $0.5 million, $0.3 million, and $0.4 million, respectively.

Undistributed earnings of the Company’s foreign subsidiaries amounted to approximately $36.6 million as of December 31, 2012. The Company has not provided any additional federal or state income taxes or foreign withholding taxes on the undistributed earnings as such earnings have been indefinitely reinvested in the business. It is impractical to estimate the amount of U.S. tax the Company could have to pay upon repatriation due to the complexity of the foreign tax credit calculations and because the Company considers its earnings permanently reinvested.

A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:


(in thousands)	2012			2011			2010
Balance as of January 1,	$	25,312		$	20,266		$	4,442
Additions based on tax positions related to the current year		3,855			7,231			54
Additions for tax positions of prior years		969			3			16
Additions for acquired uncertain tax benefits		—			—			16,670
Reductions for tax positions of prior years		(3,819	)		(2,188	)		(916	)

Balance as of December 31,	$	26,317		$	25,312		$	20,266

As of December 31, 2012, the Company had approximately $26.3 million of total unrecognized tax benefits, of which $16 million would decrease the Company’s effective tax rate if recognized. However, approximately $9.2 million of these unrecognized tax benefits relate to acquired NOLs and research tax credits, which are subject to limitations on use. The Company expects that the changes in the unrecognized benefits within the next twelve months will be approximately $0.6 million, all of which relate to the expiration of applicable statute of limitations and would reduce the Company’s effective tax rate if realized.

For the years ended December 31, 2012, 2011, and 2010, the reductions for tax positions of prior years were related to the lapse in the applicable statute of limitations for the Company’s tax years 2007 and earlier.

For the years ended December 31, 2012 and 2010, the Company recognized interest expense of approximately $0.1 million and $44,000, respectively. For the year ended December 31, 2011, the Company recognized a reduction of interest expense of approximately $0.4 million. For the years ended December 31, 2012, 2011, and 2010, the Company did not recognize any significant penalties. As of December 31, 2012 and 2011, the Company had accrued approximately $0.7 million and $0.6 million, respectively, for interest and penalties.

The Company files income tax returns in the U.S. and in foreign jurisdictions. Generally, the Company is no longer subject to U.S. federal, state, or local, or foreign income tax examinations by tax authorities for the years before 2008. With few exceptions, the statute of limitations remains open in all other jurisdictions for the tax years 2008 to the present.