Income Taxes

Income before income taxes was as follows for the indicated periods:



	Year ended December 31,
	2013		2012		2011

United States	$	15,290	$	25,417	$	11,186
Foreign	5,358		6,598		8,944
Income before income taxes	$	20,648	$	32,015	$	20,130

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



	Year ended December 31,
	2013			2012		2011

Current:
Federal	$	3,040		$	3,845	$	2,595
State	870			360		1,604
Foreign	1,884			2,176		442
Total current	5,794			6,381		4,641

Deferred:
Federal	328			4,819		1,086
State	1,669			1,198		(552		)
Foreign	(91		)	184		(45		)
Total deferred	1,906			6,201		489

Income tax expense	$	7,700		$	12,582	$	5,130

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,
	2013					2012					2011
	$			%		$			%		$			%

Income tax expense based on the U.S. statutory rate	$	7,227		35.0	%	$	11,205		35.0	%	$	7,046		35.0	%
Effect of charge related to the UK OFT matter	—			—		—			—		(3,381		)	(16.8	)
State income taxes, net of federal tax benefit	1,147			5.6		1,013			3.2		684			3.4
Permanent items	179			0.9		148			0.5		164			0.8
Effect of foreign operations	1,008			4.9		2			—		289			1.4
Net change in uncertain tax positions	(737		)	(3.6	)	(274		)	(0.9	)	(139		)	(0.7	)
Change in valuation allowance - foreign loss deferred tax assets	(898		)	(4.3	)	477			1.5		634			3.2
Federal employer tax credits	(763		)	(3.7	)	—			—		(947		)	(4.7	)
Stock-based compensation	241			1.1		382			1.2		689			3.4
Other	296			1.4		(371		)	(1.2	)	91			0.5
Income tax expense	$	7,700		37.3		$	12,582		39.3		$	5,130		25.5

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,
	2013		2012

Deferred tax assets:
Accrued compensation	$	8,597	$	9,264
Reserves and accruals	3,367		2,027
Loss and credit carryforwards	11,132		12,817
Total gross deferred tax assets	23,096		24,108
Less: valuation allowances	5,474		6,362
Net total deferred tax assets	17,622		17,746

Deferred tax liabilities:
Property and equipment depreciation	3,127		3,560
Intangible asset amortization	6,358		4,815
Other	1,147		335
Total deferred tax liabilities	10,632		8,710

Net deferred tax assets	$	6,990	$	9,036

As of December 31, 2013, the Company had state net operating loss carry forwards aggregating $93.0 million; these losses expire at various dates from 2014 through 2032.

As of December 31, 2013, the Company had foreign tax credits of $2.1 million, which expire at various dates from 2014 through 2022.

As of December 31, 2013, the Company had foreign net operating losses of $21.0 million, the majority of which can be carried forward indefinitely.

During 2013, 2012 and 2011, the Company (released)/added ($0.9 million), $0.6 million and $0.6 million, respectively, to the valuation allowance that was set up against the Company’s net foreign deferred tax assets of which $0.1 million, $0.5 million and $0.4 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. The valuation allowance of $1.0 million related to foreign deferred tax assets generated in Australia was released in 2013 upon the disposal of the AndersElite Australia Pty Limited business. The remaining valuation allowance is primarily due to cumulative losses in the UK operations of the CDI AndersElite Limited business over the past seven 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, 2013, the Company had $0.1 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,
	2013			2012			2011

Beginning balance of gross unrecognized tax benefits	$	588		$	1,070		$	1,351
Additions based on tax positions related to the current year	—			—			95
Reductions for the tax positions of prior years	(53		)	(164		)	(11		)
Reductions for settlements and payments	(323		)	(318		)	(118		)
Reductions due to statute expiration	(127		)	—			(247		)
Ending balance of gross unrecognized tax benefits	$	85		$	588		$	1,070

The Company accounts for interest and penalties related to income tax matters in income tax expense. Interest and penalties of $0.2 million were accrued as of December 31, 2013 and $0.6 million of interest and penalties were released during 2013. 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 2011. State and foreign income tax returns remain open for examination back to 2009 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, 2013, the undistributed earnings of the foreign subsidiaries amounted to approximately $40.0 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.