12. Income Taxes
Income (loss) before income tax (expense) benefit is comprised of the following components for the years ended December 31, (in thousands):
| 2012 | 2011 | 2010 | ||||||||||
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Domestic operations |
$ | 7,565 | $ | 12,156 | $ | 7,928 | ||||||
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Foreign operations |
(1,395 | ) | 7,152 | 5,338 | ||||||||
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Income before income taxes |
$ | 6,170 | $ | 19,308 | $ | 13,266 | ||||||
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Income tax (expense) benefit is comprised of the following components for the years ended December 31, (in thousands):
| Federal | Foreign | State | Total | |||||||||||||
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2012: |
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Current |
$ | (170 | ) | $ | (2,995 | ) | $ | (759 | ) | $ | (3,924 | ) | ||||
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Deferred |
(2,386 | ) | 1,090 | (145 | ) | (1,441 | ) | |||||||||
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Total income tax expense |
$ | (2,556 | ) | $ | (1,905 | ) | $ | (904 | ) | $ | (5,365 | ) | ||||
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2011: |
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Current |
$ | (160 | ) | $ | (3,660 | ) | $ | (860 | ) | $ | (4,680 | ) | ||||
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Deferred |
8,874 | 161 | 307 | 9,342 | ||||||||||||
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Total income tax (expense) benefit |
$ | 8,714 | $ | (3,499 | ) | $ | (553 | ) | $ | 4,662 | ||||||
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2010: |
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Current |
$ | (155 | ) | $ | (2,844 | ) | $ | (495 | ) | $ | (3,494 | ) | ||||
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Deferred |
— | (255 | ) | (31 | ) | (286 | ) | |||||||||
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Total income tax expense |
$ | (155 | ) | $ | (3,099 | ) | $ | (526 | ) | $ | (3,780 | ) | ||||
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The differences between the amount of tax expense provided and the amount of tax expense computed by applying the statutory federal income tax rate to income before income taxes for the years ended December 31, are as follows (in thousands):
| 2012 | 2011 | 2010 | ||||||||||
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Expected tax expense at the statutory federal rate of 35% |
$ | (2,160 | ) | $ | (6,758 | ) | $ | (4,643 | ) | |||
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(Increase) decrease in taxes resulting from: |
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Change in valuation allowance |
(2,422 | ) | 14,026 | 699 | ||||||||
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State income taxes, net |
(588 | ) | (1,022 | ) | (526 | ) | ||||||
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Foreign tax rate differences |
374 | (415 | ) | 1,047 | ||||||||
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Non-deductible expenses |
(316 | ) | (131 | ) | (232 | ) | ||||||
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Stock-based compensation and other |
(253 | ) | (1,038 | ) | (125 | ) | ||||||
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Total income tax (expense) benefit |
(5,365 | ) | 4,662 | (3,780 | ) | |||||||
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Income tax expense differs from the expected tax at statutory rates due primarily to the change in valuation allowance for deferred tax assets and different tax rates in the various state and foreign jurisdictions. Additionally, the aggregate tax expense is not always consistent when comparing periods due to the change in mix of income before income taxes between domestic and foreign operations and within the foreign operations.
At December 31, 2012, the Company had available domestic federal tax net operating loss carryforwards (“ NOLs”) of $11.0 million, which will expire, if unused, as follows: $3.0 million in 2025, $4.0 million in 2026 and $4.0 million in 2029. The utilization of these NOLs could be subject to significant limitation in the event of a “change in ownership”, as defined in the Internal Revenue Code, which might be caused by purchases or sales of the Company’s securities by persons or groups now or in the future having 5% or greater ownership of the Company’s common stock.
Deferred tax assets and liabilities result from temporary differences between the U.S. GAAP and tax treatment of certain income and expense items. The Company must assess and make estimates regarding the likelihood that the deferred tax assets will be recovered. To the extent that it is determined the deferred tax assets will not be recovered, a valuation allowance is established for such assets. In making such a determination, the Company must take into account positive and negative evidence, including projections of future taxable income and assessments of potential tax planning strategies. At December 31, 2012 and 2011, the Company’s valuation allowance was $8.5 million and $6.0 million, respectively. At the end of 2011, based on the Company’s assessment of future taxable income, it was determined that the net deferred tax assets in the United States were expected to be realized and accordingly the valuation allowance on federal deferred tax assets was reversed. This reversal of the valuation allowance, net of the utilization of domestic net operating losses and other related deferred tax changes of approximately $6.3 million during 2011, resulted in a deferred tax benefit of approximately $7.7 million which was recognized in 2011. The net deferred tax assets at December 31, 2012 and 2011 relate to U.S. federal and state, and foreign tax items.
The Company recognizes the income tax benefit associated with certain stock compensation deductions when such deductions produce a reduction in the Company’s current tax liability. Accordingly, the Company did not recognize the benefit of the tax deductions upon the exercise of stock options or vesting of restricted stock in any of the years ended December 31, 2012, 2011 or 2010. The benefit will be recorded in future periods when the Company realizes the income tax benefit with an offset to income taxes payable.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, are as follows (in thousands):
| 2012 | 2011 | |||||||
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Deferred tax assets: |
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Federal net operating loss carryforwards |
$ | 2,322 | $ | 5,535 | ||||
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Alternative minimum tax credit carryforwards |
3,225 | 3,046 | ||||||
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State net operating loss carryforwards |
586 | 731 | ||||||
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Accrued expenses |
3,346 | 2,812 | ||||||
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Foreign subsidiaries, primarily NOLs, pension and accrued expenses |
15,270 | 10,229 | ||||||
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Other |
1,066 | 831 | ||||||
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Total gross deferred tax assets |
25,815 | 23,184 | ||||||
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Deferred tax liabilities: |
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Property and equipment and other long-term assets |
(5,028 | ) | (4,784 | ) | ||||
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Foreign deferred tax liabilities, primarily property and equipment |
(543 | ) | (332 | ) | ||||
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Net deferred tax asset before valuation allowance |
20,244 | 18,068 | ||||||
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Less valuation allowance |
(8,531 | ) | (5,954 | ) | ||||
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Net deferred tax asset |
$ | 11,713 | $ | 12,114 | ||||
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Current net deferred tax assets of $7.6 million and $6.9 million and long-term net deferred tax assets of $5.3 million and $5.6 million were recorded at December 31, 2012 and 2011, respectively. Long-term deferred tax liability of $1.2 million and $0.4 million were recorded at December 31, 2012 and 2011, respectively. In 2012 and 2011, a deferred tax benefit of $1.1 million and $0.7 million, respectively, related to changes in pension net actuarial loss and prior service credit were recorded in other comprehensive income.
A reconciliation of the change in the unrecognized tax benefits for the years December 31, is as follows (in thousands):
| 2012 | 2011 | 2010 | ||||||||||
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Balance at beginning of year |
$ | 1,053 | $ | 803 | $ | 1,007 | ||||||
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Additions based on tax positions |
381 | 447 | 256 | |||||||||
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Reductions due to lapses of statutes of limitations |
(285 | ) | (197 | ) | (460 | ) | ||||||
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Balance at end of year |
$ | 1,149 | $ | 1,053 | $ | 803 | ||||||
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Unrecognized tax benefits at December 31, 2012, 2011 and 2010 of $1.1 million, $1.1 million and $0.8 million, respectively, for uncertain tax positions related primarily to transfer pricing are included in other liabilities on the consolidated balance sheets and would impact the effective tax rate for certain foreign jurisdictions if recognized. The Company incurred no significant interest or penalties for any of the years ended December 31, 2012, 2011 or 2010.
The Company and its subsidiaries file numerous consolidated and separate income tax returns in the United States as well as various foreign jurisdictions. The Company’s U.S. federal income tax returns for 2009 and subsequent years remain subject to examination. Additionally, NOLs originating in years prior to 2009 could be subject to examination to the extent of the loss carryforwards. All material foreign income tax matters have been concluded for years through 2006. Undistributed earnings of the Company’s foreign subsidiaries are considered to be permanently reinvested and, accordingly, no provision for U.S. federal or state income taxes has been provided thereon.