16.

INCOME TAXES

Effective tax rate

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


(in thousands)	2014		2013		2012
Domestic	$	36,485	$	47,054	$	20,497
Foreign		11,509		9,339		10,448

Total income before provision	$	47,994	$	56,393	$	30,945

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


(in thousands)	2014			2013			2012
Current:
Federal	$	22,488		$	20,277		$	12,128
State		2,952			2,054			971
Foreign		3,195			3,027			2,142

Total current provision		28,635			25,358			15,241

Deferred:
Federal		(11,972	)		(6,069	)		(4,759	)
State		(1,209	)		(634	)		(870	)
Foreign		(715	)		(305	)		(535	)

Total deferred benefit		(13,896	)		(7,008	)		(6,164	)

Total provision	$	14,739		$	18,350		$	9,077

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


	2014			2013			2012
Statutory federal income tax rate		35.0	%		35.0	%		35.0	%
Valuation allowance		0.5			—			(3.0	)
Transaction costs		—			0.4			—
State income taxes, net of federal benefit and tax credits		1.8			1.4			(0.8	)
Permanent differences		1.3			1.0			1.7
Domestic production activities		(4.9	)		(3.8	)		(3.9	)
Federal research and experimentation credits		(1.7	)		(2.8	)		—
Tax effects of foreign activities		(2.2	)		(1.9	)		(2.7	)
Tax-exempt income		(0.1	)		(0.1	)		(0.1	)
Provision to return adjustments		—			0.8			0.6
Non-deductible compensation		2.5			1.2			1.5
Provision for uncertain tax positions		(0.7	)		1.5			2.8
Other		(0.8	)		(0.2	)		(1.8	)

Effective income tax rate		30.7	%		32.5	%		29.3	%

Deferred income taxes

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)	2014			2013 (1)
Deferred tax assets:
Net operating loss carryforwards	$	86,770		$	87,709
Accruals and reserves		24,393			21,191
Software revenue		13,199			7,863
Depreciation		4,655			4,374
Tax credit carryforwards		6,028			5,359
Other		38			(22	)

Total deferred tax assets		135,083			126,474
Less valuation allowances		(35,620	)		(36,076	)

Total deferred tax assets	$	99,463		$	90,398

Deferred tax liabilities:
Intangibles	$	(17,231	)	$	(21,317	)

Total deferred tax liabilities		(17,231	)		(21,317	)

Net deferred income tax assets	$	82,232		$	69,081

Reported as:
Current deferred tax asset	$	12,974		$	12,336
Long-term deferred income tax assets		69,258			56,745

Total deferred income taxes	$	82,232		$	69,081

(1)	The purchase price adjustments related to the Antenna acquisition identified during 2014 were retrospectively applied as of December 31, 2013. See Note 8 “Acquisitions” for further discussion of these adjustments.

The Company regularly assesses the need for a valuation allowance against its deferred tax assets. In making that assessment, the Company considers both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more-likely-than-not that some or all of the deferred tax assets will not be realized. This determination requires significant judgment, including assumptions about future taxable income that are based on historical and projected information. There were no material adjustments to the Company’s valuation allowance position during 2014. The $0.5 million net decrease in the valuation allowance during the period primarily relates to movements in foreign exchange rates. The $24 million net increase in the valuation allowance during 2013 primarily relates to the valuation allowance recorded against the acquired Antenna federal and foreign NOLs that the Company had preliminarily determined it would not be able to utilize due to various limitations and restrictions.

The Company acquired approximately $39.6 million and $58.1 million of federal and foreign NOLs, respectively, in the Antenna acquisition. The Company has determined that it may utilize $7.5 million of the acquired Antenna federal NOLs under the applicable section 382 limitation, and these losses are scheduled to expire through 2031. A valuation allowance is recorded on the deferred tax assets in excess of the federal NOLs that are deemed recoverable under the limitation. With regard to the acquired foreign NOLs, a full valuation allowance has been recorded as of December 31, 2014 due to uncertainty regarding the availability of these NOLs to offset future income generated by the related foreign businesses due to limitations under local country change in control provisions. As of December 31, 2014, the Company had approximately $39.3 million of acquired Antenna federal NOLs, which are subject to annual use limitations under section 382. Based on those limitations, the Company anticipates using $7.1 million of the remaining NOLs by 2031.

As of December 31, 2014, the Company had approximately $115.8 million of acquired Chordiant federal NOLs, which are subject to annual use limitations under section 382. Based on those limitations, the Company anticipates using $90 million of the remaining NOLs by 2029. In addition, the Company has $0.7 million of deferred tax assets related to state NOLs as of December 31, 2014.

As of December 31, 2014, the Company had available $6.2 million of state tax research and experimentation (“R&E”) credits and $0.5 million of investment tax credits expiring in the years 2015 through 2029.

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 is scheduled to expire in 2022. For the years ended December 31, 2014, 2013, and 2012, the effect of the income tax holiday was to reduce the overall income tax provision by approximately $0.8 million, $0.5 million, and $0.5 million, respectively. The benefit of the tax holiday on net income per share (diluted) was $0.01 for each of the years ended December 31, 2014, 2013, and 2012.

In 2014, the Company reduced its income tax payable by $3.1 million for the tax benefit realized from the exercise, sale or vesting of equity awards.

Undistributed earnings of the Company’s foreign subsidiaries amounted to approximately $44.7 million as of December 31, 2014. 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 tax the Company could have to pay upon repatriation due to the complexity of foreign tax credit calculations and because the Company considers its earnings permanently reinvested.

Uncertain tax benefits and other considerations

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


(in thousands)	2014			2013			2012
Balance as of January 1,	$	40,929		$	26,317		$	25,312
Additions based on tax positions related to the current year		4,041			4,320			3,855
Additions for tax positions of prior years		285			350			969
(Reductions) Additions for acquired uncertain tax benefits		(716	)		10,268			—
Reductions for tax positions of prior years		(1,143	)		(326	)		(3,819	)

Balance as of December 31,	$	43,396		$	40,929		$	26,317

As of December 31, 2014, the Company had approximately $43.4 million of total unrecognized tax benefits, of which $23.4 million would decrease the Company’s effective tax rate if recognized. However, approximately $20 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 $0.5 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 year ended December 31, 2014, the reductions for tax positions of prior years were related to the lapse in the applicable statute of limitations, revision of purchase accounting estimates, settlements of audits, and the impact for foreign currency exchange rates. For the years ended December 31, 2013 and 2012, the reductions for tax positions of prior years were all related to the lapse in the applicable statute of limitations.

The Company recognizes interest accrued and penalties related to unrecognized tax benefits in the income tax provision. For the years ended December 31, 2014, 2013, and 2012, the Company recognized interest expense of approximately $0.3 million, $0.3 million, and $0.1 million, respectively. For the years ended December 31, 2014, 2013, and 2012, the Company did not recognize any significant penalties. As of December 31, 2014 and 2013, the Company had accrued approximately $1.5 million and $1.1 million, respectively, for interest and penalties.

The Company files income tax returns in the U.S. and in foreign jurisdictions. The Company’s 2011, 2012 and 2013 federal income tax returns are under examination. The Company is generally not 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 jurisdictions for the tax years 2009 to the present.