Income Taxes

12 Months Ended

Dec. 31, 2011

Notes to Financial Statements

Income Taxes

8. Income Taxes

The income tax (expense) benefit is summarized as follows:

	Years Ended December 31,
	2011			2010			2009
Current:
Federal	$	83		$	3		$	(317	)
State		11			2			2
		94			5			(315	)
Deferred:
Federal		(359	)		32			1,327
State		(8	)		(30	)		79
		(367	)		2			1,406
	$	(273	)	$	7		$	1,091

A reconciliation of the statutory United States income tax rate to the effective income tax rate follows:

	Years Ended December 31,
	2011			2010			2009
Statutory U.S. income tax rate		(34.0	)%		(34.0	)%		34.0	%
States taxes, net of federal benefit		(0.58	)%		(4.4	)%		2.4	%
Permanent differences		11.07	%		19.0	%		1.1	%
Change in valuation allowance		(9.13	)%		52.0	%		0.0	%
Change in net operating loss carryforwards and
tax credits		(3.36	)%		(33.2	)%		(5.5	)%
Other		0.42	%		1.7	%		(0.4	)%
Effective income tax rate		35.58	%		1.1	%		31.6	%

The components of the deferred income tax assets (liabilities) are as follows:

	December 31,
	2011					2010
	Current		Long Term			Current		Long Term
Deferred tax assets:
Operating loss carryforwards	$	1,224	$	3,109		$	368	$	5,359
R and D tax credit		—		860			—		832
AMT tax credit		—		202			—		122
Section 263A costs		496		—			293		—
Research and development costs		244		1,432			132		108
Amortization		—		15			—		11
Asset reserves:
Bad debts		16		—			16		—
Inventory reserve		987		—			933		—
Accrued expenses:
Non-qualified stock options		—		78			—		77
Compensation		187		—			190		—
Warranty		304		—			233		—
Deferred tax assets		3,458		5,696			2,165		6,509
Less valuation allowance		—		(250	)		—		(320	)
Less APIC pool reserve		—		(380	)		—		(380	)
Total deferred tax assets		3,458		5,066			2,165		5,809
Deferred tax liabilities:
Depreciation		—		(354	)		—		(172	)
Total deferred tax liabilities		—		(354	)		—		(172	)
Net deferred tax assets	$	3,458	$	4,712		$	2,165	$	5,637

As of December 31, 2011, the Company had a net deferred tax asset of approximately $8,170. This asset is primarily composed of net operating loss carry forwards (NOLs). The NOLs total $10,736 for federal and $18,838 for state purposes as of December 31, 2011, with expirations starting in 2017 through 2030. Included in the Company’s NOLs as of December 31, 2011 is approximately $1,009 from the exercises of stock options. The benefit from utilization of this portion of the NOL, which equates to a deferred tax asset of approximately $380 and is reserved through a valuation allowance at December 31, 2011, will be recorded as a debit to valuation allowance and credit to additional paid in capital when the related deferred tax asset is realized.

During 2011 and 2010 the Company utilized $4,160 and generated $106, respectively, of its NOLs. The NOL utilization assumes an election under §59(e) to capitalize and amortize certain tax preferences – specifically §174(a) research and development expenditures. The deferred tax asset amounts are based upon management’s conclusions regarding, among other considerations, the Company’s current and anticipated customer base, contracts, and product introductions, certain tax planning strategies, and management’s estimates of future earnings based on information currently available, as well as recent operating results during 2011, 2010, and 2009. ASC Topic 740 “Income Taxes” requires that all positive and negative evidence be analyzed to determine if, based on the weight of available evidence, the Company is more likely than not to realize the benefit of the deferred tax asset.

The Company has evaluated the available evidence and the likelihood of realizing the benefit of its deferred tax asset. Based on this evaluation, the weight of available evidence supports the conclusion that the Company, more likely than not, will not realize a portion of the benefit of its state deferred tax assets. For 2011, the Company has established a valuation allowance of $250 for the portion of benefit of its state deferred tax assets that more likely than not will not be realized. Should the factors underlying management’s analysis change, future valuation adjustments to the Company’s net deferred tax assets may be necessary. If future losses are incurred, it may be necessary to record an additional valuation allowance related to the Company’s net deferred tax assets recorded as of December 31, 2011. It cannot presently be estimated what, if any, changes to the valuation of the Company’s deferred tax asset may be deemed appropriate in the future. The 2011 federal and state net operating loss and tax credit carryforwards could be subject to limitation if, within any three year period prior to the expiration of the applicable carryforward period, there is a greater than 50% change in ownership of the Company.

For the years ended December 31, 2011, 2010, and 2009, the Company incurred $83, $3 and $45, respectively in alternative minimum tax expense in connection with the federal limitation on alternative tax net operating loss carry-forwards.

As a result of the implementation of ASC Topic 740 “Income Taxes”, the Company performed a comprehensive review of its portfolio of uncertain tax positions in accordance with recognition standards established by ASC Topic 740 “Income Taxes”. In this regard, an uncertain tax position represents the Company’s expected treatment of a tax position taken in a filed tax return or planned to be taken in a future tax return, that has not been reflected in measuring income tax expense for financial reporting purposes. As a result of this review, on January 1, 2012, the Company is not aware of any uncertain tax positions that would require additional liabilities or which such classification would be required. The amount of unrecognized tax positions did not change as of December 31, 2011 and the Company does not believe there will be any material changes in its unrecognized tax positions over the next twelve months.

Tax penalties and related interest expense, of which there were no material amounts for the year ended December 31, 2011 are reported as a component of income tax expense.

The Company files federal income tax returns, as well as multiple state and local jurisdiction tax returns. A number of years may elapse before an uncertain tax position is audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution on any particular uncertain tax position, the Company believes that its reserves for income taxes reflect the most probable outcome. The Company adjusts these reserves, as well as the related interest, in light of changing facts and circumstances. The resolution of a matter would be recognized as an adjustment to the provision for income taxes and the effective tax rate in the period of resolution. The calendar years 2008, 2009, and 2010 are still open to IRS examination under the statute of limitations. An IRS examination on the Company’s 2007 calendar year was recently closed with no change.