Note J - Income Taxes

12 Months Ended

Dec. 31, 2011

Income Tax Disclosure [Text Block]

NOTE J - INCOME TAXES

The provision for income tax expense/(benefit) includes the following for the years ended December 31 (in thousands):

	2011		2010			2009
Current:
United States
Federal	$	2,278	$	(699	)	$	(10,681	)
State		144		74			339
Foreign		642		565			664
Deferred:
United States
Federal		12		6,156			2,178
State		0		1,967			(1,062	)
Foreign		675		(131	)		(1,101	)
Total income tax expense/(benefit)	$	3,751	$	7,932		$	(9,663	)

A reconciliation from the U.S. federal statutory income tax rate to the effective tax rate for the years ended December 31 were as follows:

	2011			2010			2009
U.S. Federal statutory rate		35.0	%		35.0	%		(35.0	)%
State income taxes		3.9			3.9			(2.0	)
Net results of foreign subsidiaries		(9.5	)		(6.0	)		4.0
Valuation allowance		(26.4	)		(45.2	)		0.0
Goodwill impairment		(1.9	)		0.0			4.3
Non-deductible executive compensation		(4.2	)		0.0			0.0
Other		(3.1	)		(1.2	)		2.7
Total effective tax rate		(6.2	)%		(13.5	)%		(26.0	)%

At any point in time, many tax years are subject to audit by various taxing jurisdictions.  The results of these audits and negotiations with tax authorities may affect tax positions taken by the Company.  Additionally, the Company’s effective tax rate in a given financial statement period may be materially impacted by changes in the geographic mix or level of earnings.

The federal income tax returns for 2006 through 2009 and certain state returns for 2007 and 2008 are currently under various stages of audit by the applicable taxing authorities.  The Company received a Notice of Proposed Adjustment from the Internal Revenue Service (“IRS”) for tax years 2006 and 2007 of $7,114,000 (which includes $1,186,000 in penalties).  Interest will be assessed, and at this time it is estimated at approximately $1,614,000.  This issue has been sent to the IRS Appeal’s office for further consideration.  The Company does not agree with this adjustment and plans to vigorously defend its position.  The Company does not believe that an additional tax accrual is required at this time.  The amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year.  The Company’s material tax jurisdiction is the United States.

In January 2012, the Company received a Notice of Proposed Adjustment for the 2008 tax year, which is similar to the one discussed above. The 2008 proposed adjustment which is estimated at $1,369,000, if settled, will not create any additional financial statement impact due to the available tax U.S. losses that may be carried back from the 2010 tax year to the 2008 tax year.

Deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and the tax basis of assets and liabilities given the provisions of the enacted tax laws.  The net current and non-current components of deferred income taxes recognized in the balance sheets are as follows as of December 31 (in thousands):

	2011		2010
Net current deferred income tax assets	$	0	$	0
Net non-current deferred income tax assets		2,914		3,913
Net deferred income tax asset	$	2,914	$	3,913

Significant components of the Company’s deferred tax assets and liabilities are as follows as of December 31 (in thousands):

	2011			2010
Assets:
State taxes	$	5,242		$	3,465
Bad debt reserves		454			359
Inventory reserve and capitalized costs		2,959			1,982
Sales return reserve		686			289
Deferred compensation plan		0			2,845
Stock-based compensation		3,969			3,545
Foreign research and development credit		28			291
Alternative minimum tax credit and U.S. foreign tax credit		3,660			2,409
Palladium Contingent Purchase Price		77			116
Federal net operating losses		30,998			15,467
Foreign net operating losses		2,341			3,179
Other		2,257			1,644
Gross deferred tax assets		52,671			35,591
Liabilities:
Contingent purchase payments		(156	)		(156	)
Depreciation		(3,808	)		(4,163	)
Other		(274	)		(181	)
Gross deferred tax liabilities		(4,238	)		(4,500	)
Valuation allowance:
United States		(45,147	)		(26,717	)
Foreign		(372	)		(461	)
Valuation allowance		(45,519	)		(27,178	)
Net deferred tax asset	$	2,914		$	3,913

At December 31, 2011, the Company had income taxes receivable of $770,000, which was related to a U.S. refund for the carryback of the 2010 loss to the 2008 tax year.  This amount was received in February 2012.  During 2011, the Company remained in a three year pre-tax cumulative loss position.  The Company can no longer support future profitability sufficient enough to realize its deferred tax assets in the near future and has a valuation allowance of $45,519,000 and $27,178,000 at December 31, 2011 and 2010, respectively.    At December 31, 2011, the Company had a net deferred tax asset of $2,914,000 which consisted of U.S. foreign tax credits which will offset tax in prior taxable years and foreign net operating losses which primarily relate to the pre-acquisition losses of Palladium, a French company, which has an unlimited carryforward period.  The Company has not recorded a valuation allowance against U.S. deferred tax in the amount of $35,000 for the eventual carryback of foreign tax credits to the 2006 tax year as the Company believes it is more-likely-than-not that it will be utilized.  The Company has foreign net operating losses of $2,879,000 at December 31, 2011, which are primarily related to the pre-acquisition losses of Palladium, a French company.  The carryforward period in France is unlimited.  The Company has not recorded a valuation allowance against certain foreign net operating losses as the Company believes it is more-likely-than-not that the loss carryforwards will be utilized.  The ultimate realization of the loss carryforward is dependent upon the generation of future taxable income outside of the U.S. during the periods in which those temporary differences become deductible  This assessment could change in future periods if the Company does not achieve taxable income in these foreign tax jurisdictions or projections of future taxable income decline.  Changes in existing tax laws could also affect actual tax results and the valuation of deferred tax assets over time.  The accounting for deferred taxes is based upon an estimate of future operating results.  Differences between the anticipated and actual outcomes of these future tax consequences could have a material impact on the Company’s consolidated results of operations or financial position.  If an increase in the valuation allowance in future periods is required, this would result in an increase in the Company’s income tax expense and could materially impact the effective income tax rate in the period recorded.

The Company’s recognized uncertain tax positions at December 31 are as follows (in thousands):

	2011			2010
Uncertain tax positions	$	7,112		$	6,302
Interest on uncertain tax positions		1,272			1,044
Total uncertain tax positions, gross		8,384			7,346
Less federal income tax benefit		(568	)		(542	)
Total uncertain tax positions, net	$	7,816		$	6,804

During the years ended December 31, 2011, 2010 and 2009, the Company recognized income tax expense related to uncertain tax positions of $810,000, $137,000 and $45,000, respectively, and interest expense on uncertain tax positions of $228,000, $141,000 and $147,000, respectively.  The Company did not recognize any related penalties for uncertain tax positions for the years ended December 31, 2011, 2010 and 2009.

The Company does not expect its uncertain tax positions to change significantly over the next twelve months.  A reconciliation of the beginning and ending amount of the Company’s uncertain tax positions, gross, at December 31 is as follows (in thousands):

	2011		2010
Beginning balance	$	7,346	$	7,068
Additions for uncertain tax positions		1,038		922
Reduction for uncertain tax positions:
Expiration of statute of limitations		0		(644	)
Ending balance	$	8,384	$	7,346