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11. INCOME TAXES
 12 Months Ended
Dec. 31, 2013
Income Tax Disclosure [Abstract]  
INCOME TAXES

For the years ended December 31, 2013, 2012 and 2011, we recognized income tax expense (benefit) comprised of the following:

 

   Years Ended December 31, 
   2013   2012   2011 
             
State current tax  $643   $1,160   $820 
Other current tax   (39)   32    – 
Federal deferred tax   3,794    (46,901)   – 
State deferred tax   (888)   (9,518)   – 
Income tax expense (benefit)  $3,510   $(55,227)  $820 

 

A reconciliation of the statutory U.S. federal rate and effective rates is as follows (in thousands):

 

   Years Ended December 31, 
   2013   2012   2011 
             
Federal tax   34.00%    34.00%    34.00% 
State franchise tax, net of federal benefit   9.78%    17.49%    6.74% 
Non deductible expenses   2.05%    1.59%    4.97% 
Equity compensation   35.39%    10.69%    9.43% 
Changes in valuation allowance   -17.88%    -1325.53%    -45.09% 
Other   -3.70%    0.00%    0.00% 
Income tax expense (benefit)   59.64%    -1261.76%    10.05% 

 

Deferred income taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial and income tax reporting purposes and operating loss carryforwards.

 

 

Our deferred tax assets and liabilities comprise the following (in thousands):

 

   December 31, 
Deferred tax assets:  2013   2012 
Net operating losses  $82,630   $81,348 
Accrued expenses   11,663    9,679 
Unfavorable contract liability   3,365    3,901 
Equity compensation   645    2,406 
Allowance for doubtful accounts   –    1,831 
Other   1,400    1,194 
Valuation allowance   (6,593)   (7,645)
Total deferred tax assets  $93,110   $92,714 
           
Deferred tax liabilities:          
Property & equipment   (7,948)   (9,680)
Goodwill   (15,101)   (14,221)
Intangibles   (12,162)   (10,411)
Allowance for doubtful accounts   (3,061)   – 
Other   (1,603)   (2,260)
Total deferred tax liabilities  $(39,875)  $(36,572)
           
Net deferred tax asset  $53,235   $56,142 

 

As of December 31, 2013, we had federal net operating loss carryforwards of approximately $218.9 million, which expire at various intervals from the years 2017 to 2033. We also had state net operating loss carryforwards of approximately $155.3 million, which expire at various intervals from the years 2014 through 2033. As of December 31, 2013, $23.5 million of our federal net operating loss carryforwards acquired in connection with the 2011 acquisition of Raven Holdings U.S., Inc. were subject to limitations related to their utilization under Section 382 of the Internal Revenue Code. Future ownership changes as determined under Section 382 of the Internal Revenue Code could further limit the utilization of net operating loss carryforwards.  Cumulative excess tax benefits of $4.9 million, related to the exercise of nonqualified stock options, will be recorded in equity when realized.

 

We consider all evidence available when determining whether deferred tax assets are more likely-than-not to be realized, including projected future taxable income, scheduled reversals of deferred tax liabilities, prudent tax planning strategies, and recent financial operations. The evaluation of this evidence requires significant judgment about the forecasts of future taxable income, based on the plans and estimates we are using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income. As of December 31, 2013, we have determined that deferred tax assets of $93.1 million are more likely-than-not to be realized. We have also determined that deferred tax liabilities of $15.1 million are required related to book basis in goodwill that has an indefinite life.

 

Prior to 2012, we had recorded a valuation allowance on the majority of our deferred tax assets to reduce the deferred tax assets to the amount that was believed more likely-than-not to be realized. In assessing the need for a valuation allowance, we considered all available positive and negative evidence, including past results, the existence of cumulative losses in prior years, forecasted future taxable income, and prudent tax planning strategies. During 2012, the majority of our valuation allowance, primarily related to net operating losses (NOLs), was reversed based on historical earnings and forecasts of future taxable income, resulting in the recognition of a $56.2 million tax benefit. The remaining valuation allowance primarily relates to state NOL’s.

 

For the next five years, and thereafter, federal net operating loss carryforwards expire as follows (in thousands):

 

Year Ended  Total Net
Operating Loss Carryforwards		   Amount
Subject to 382 limitation		 
2014  $–   $– 
2015   –    – 
2016   –    – 
2017   15,184    – 
2018   12,284    – 
Thereafter   191,471    23,475 
   $218,939   $23,475 

 

 

We file consolidated income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. We continue to reinvest earnings of the non-US entities for the foreseeable future and therefore have not recognized any U.S. tax expense on these earnings. With limited exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2009. We do not anticipate the results of any open examinations would result in a material change to its financial position.

 

A reconciliation of the total gross amounts of unrecognized tax benefits (excluding interest, penalties and the federal tax benefit of state taxes related to unrecognized tax benefits) for the years ended December 31, 2011, 2012, and 2013 is as follows (in thousands):

 

Unrecognized tax benefit at January 1, 2011   2,923 
Additional based on current year tax positions   833 
Unrecognized tax benefit at December 31, 2011   3,756 
Additional based on current year tax positions   428 
Unrecognized tax benefit at December 31, 2012  $4,184 
Reduction based on prior year tax positions   (214)
Unrecognized tax benefit at December 31, 2013  $3,970 

 

We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense. We recognized no penalties and interest during the years ended December 31, 2013, 2012 and 2011. During the year ended December 31, 2010, we accrued interest and penalties of $90,000. At December 31, 2013, we determined that the statute of limitations had run out and that this was no longer our obligation and accordingly reduced it to zero. Unrecognized tax benefits of $304,000 are included in accounts payable, accrued liabilities and other and $3,666,000 as a reduction to non-current deferred tax assets at December 31, 2013.