Income Taxes

Income (loss) before income taxes were as follows for the indicated periods:



	Year ended December 31,
	2012		2011		2010

United States	$	25,417	$	11,186	$	13,194
Foreign	6,598		8,944		(16,340		)
Income (loss) before income taxes	$	32,015	$	20,130	$	(3,146	)

Income tax expense was comprised of the following for the indicated periods:



	Year ended December 31,
	2012		2011			2010

Current
Federal	$	3,845	$	2,595		$	4,638
State	360		1,604			1,007
Foreign	2,176		442			(179		)
Total current	6,381		4,641			5,466

Deferred
Federal	4,819		1,086			706
State	1,198		(552		)	206
Foreign	184		(45		)	1,290
Total deferred	6,201		489			2,202

Income Tax Expense	$	12,582	$	5,130		$	7,668

The following table reconciles income tax expense and rate based on the U.S. statutory rate to the Company’s income tax expense for the indicated periods:



	Year ended December 31,
	2012					2011					2010
	$			%		$			%		$			%

Income tax expense based on the U.S. statutory rate	$	11,205		35.0	%	$	7,046		35.0	%	$	(1,101	)	35.0	%
Effect of impairment charge related to a goodwill write-down	—			—		—			—		2,909			(92.5	)
Effect of settlement with the DOJ ⁽¹⁾	—			—		—			—		(863		)	27.4
Effect of charge related to the UK OFT matter	—			—		(3,381		)	(16.8	)	—			—
State income taxes, net of federal tax benefit	1,013			3.2		684			3.4		563			(17.9	)
Permanent items	148			0.5		164			0.8		283			(9.0	)
Effect of foreign operations	2			—		289			1.4		1,373			(43.6	)
Net change in uncertain tax positions	(274		)	(0.9	)	(139		)	(0.7	)	119			(3.8	)
Adjustment to deferred taxes, pertaining to prior years	—			—		—			—		558			(17.7	)
Change in valuation allowance - foreign loss deferred tax assets	477			1.5		634			3.2		3,293			(104.7	)
HIRE Act income tax credit	—			—		(947		)	(4.7	)	—			—
Stock-based compensation	382			1.2		689			3.4		408			(13.0	)
Other	(371		)	(1.2	)	91			0.5		126			(4.0	)
Income tax expense	$	12,582		39.3		$	5,130		25.5		$	7,668		(243.7	)


⁽¹⁾	The Company paid $2.4 million in 2010 to settle a claim brought by the U.S. Department of Justice ("DOJ") and an individual relator. The Company originally reserved $4.3 million in 2009 and reversed $1.8 million concurrent with the settlement through "Operating and administrative expenses" in the consolidated statements of operations.

The tax effects of temporary differences that give rise to the Company’s deferred tax accounts were as follows for the indicated periods:



	December 31,
	2012			2011

Deferred tax assets:
Accrued compensation	$	9,264		$	11,126
Reserves and accruals	2,027			4,635
Bad debts	—			1,145
Loss and credit carryforwards	12,817			10,912
Total gross deferred tax assets	24,108			27,818
Less: valuation allowances	(6,362		)	(5,354		)
Net total deferred tax assets	17,746			22,464

Deferred tax liabilities:
Property and equipment depreciation	(3,560		)	(4,098		)
Intangible asset amortization	(4,815		)	(2,135		)
Other	(335		)	(1,016		)
Total deferred tax liabilities	(8,710		)	(7,249		)

Net deferred tax assets	$	9,036		$	15,215

As of December 31, 2012, the Company had state net operating loss carry forwards aggregating $98.9 million; these losses expire at various dates from 2014 through 2032.

As of December 31, 2012, the Company had foreign tax credits of $2.2 million, which expire at various dates from 2013 through 2022.

As of December 31, 2012, the Company had foreign net operating losses of $20.0 million, the majority of which can be carried forward indefinitely.

During 2012, 2011 and 2010, the Company added $0.6 million, $0.6 million and $3.4 million, respectively, to the valuation allowance that was set up against the Company’s net foreign deferred tax assets of which $0.5 million, $0.4 million and $2.8 million, respectively, related to the valuation allowance set up against the Company’s net foreign deferred tax assets to fully reserve previously recorded tax benefits generated in the UK. This valuation allowance is primarily due to cumulative losses in the UK operations of the CDI AndersElite Limited business over the past 6 years. A valuation allowance has been established for the state net operating loss carry forwards and foreign tax credit carry forwards to reduce the assets to a level which, more likely than not, will be realized. Realization is dependent upon generating sufficient state taxable income, foreign taxable income and foreign source income, respectively, in the appropriate jurisdictions prior to the expiration of the carry forwards. In addition, the Company has considered available tax planning strategies as part of the establishment of the valuation allowances. The deferred tax asset considered realizable could be reduced if estimates of these amounts during the carry forward period are reduced.

As of December 31, 2012, the Company had $0.6 million of total gross unrecognized tax benefits that, if recognized, would impact the effective tax rate. The Company expects the unrecognized tax benefits to change over the next 12 months if certain tax matters ultimately settle with the applicable taxing jurisdiction during this timeframe, or if the applicable statute of limitations lapses. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows for the indicated periods:



	Year ended December 31,
	2012			2011			2010

Beginning balance of gross unrecognized tax benefits	$	1,070		$	1,351		$	2,189
Reductions in gross unrecognized tax benefits	—			—			(912		)
Additions based on tax positions related to the current year	—			95			—
Reductions for the tax positions of prior years	(164		)	(11		)	342
Reductions for settlements and payments	(318		)	(118		)	(70		)
Reductions due to statute expiration	—			(247		)	(198		)
Ending balance of gross unrecognized tax benefits	$	588		$	1,070		$	1,351

The Company accounts for interest and penalties related to income tax matters in income tax expense. Interest and penalties of $0.8 million was accrued as of December 31, 2012, none of which was recorded during 2012. The Company files a consolidated U.S. federal income tax return and files state and foreign income tax returns in various jurisdictions as required. The U.S. federal tax return is open for examination back to 2009 and 2010 is under IRS audit. State and foreign income tax returns remain open for examination back to 2008 in major jurisdictions in which the Company operates.

The Company has not recorded incremental deferred income taxes on the undistributed earnings of its foreign subsidiaries because it is management’s intention to reinvest such earnings for the foreseeable future. As of December 31, 2012, the undistributed earnings of the foreign subsidiaries amounted to approximately $39.7 million. Upon distribution of these earnings in the form of dividends or otherwise, the Company would be subject to U.S. income taxes and foreign withholding taxes, reduced by certain foreign tax credits.