Note I - Income Taxes

12 Months Ended

Dec. 31, 2012

Income Tax Disclosure [Text Block]

NOTE I - INCOME TAXES

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

	2012		2011		2010
Current:
United States
Federal	$	1,681	$	2,278	$	(699	)
State		83		144		74
Foreign		826		642		565
Deferred:
United States
Federal		0		12		6,156
State		0		0		1,967
Foreign		607		675		(131	)
Total income tax expense	$	3,197	$	3,751	$	7,932

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:

	2012			2011			2010
U.S. Federal statutory rate		35.0	%		35.0	%		35.0	%
State income taxes		5.1			3.9			3.9
Net results of foreign subsidiaries		(8.7	)		(9.5	)		(6.0	)
Valuation allowance		(38.5	)		(26.4	)		(45.2	)
Goodwill impairment		0.0			(1.9	)		0.0
Non-deductible executive compensation		0.0			(4.2	)		0.0
Other		(3.0	)		(3.1	)		(1.2	)
Total effective tax rate		(10.1	)%		(6.2	)%		(13.5	)%

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 are currently under various stages of audit by the Internal Revenue Service (“IRS”).  The Company received a Notice of Proposed Adjustment from the 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 $1,879,000.  This issue, which relates to intercompany transfer pricing, has been sent to the IRS Appeal’s office for further consideration.  The Company does not believe that an additional tax accrual is required at this time.

In January 2012, the Company received a Notice of Proposed Adjustment for the 2008 tax year, also regarding intercompany transfer pricing.  The 2008 proposed adjustment is $251,000.  Interest will be assessed, and at this time it is estimated at approximately $40,000.  This issue has been sent to the IRS Appeal’s office for further consideration.  This will not create any additional financial statement impact due to the available U.S. tax losses that may be carried back from the 2010 tax year to the 2008 tax year.

Also in January 2012, the Company received a Notice of Proposed Adjustment for the 2009 tax year of $496,000 related to the gain on sale of certain Royal Elastics assets.  Interest will not be assessed as the adjustment will reduce the Company’s net operating loss for 2009.  The Company has agreed to this adjustment.  The IRS did not propose an adjustment to the Company’s 2009 intercompany transfer pricing even though the Company’s intercompany transfer pricing methodology has been the same during the 2006 to 2009 period.

The Company does not agree with the 2006 through 2008 adjustments and plans to vigorously defend its position.  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.

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 non-current deferred income taxes recognized at December 31 were as follows (in thousands):

	2012		2011
Net non-current deferred income tax assets	$	2,308	$	2,914

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

	2012			2011
Assets:
State taxes	$	9,620		$	5,242
Bad debt reserves		391			454
Inventory reserve and capitalized costs		2,951			2,959
Sales return reserve		546			686
Stock-based compensation		4,374			3,969
Foreign research and development credit		33			28
Alternative minimum tax credit and U.S. foreign tax credit		4,254			3,660
Palladium Contingent Purchase Price		61			77
Federal net operating losses		41,601			30,998
Foreign net operating losses		1,914			2,341
Other		2,538			2,257
Gross deferred tax assets		68,283			52,671
Liabilities:
Depreciation		(3,887	)		(3,808	)
Other		(451	)		(430	)
Gross deferred tax liabilities		(4,338	)		(4,238	)
Valuation allowance:
United States		(61,062	)		(45,147	)
Foreign		(575	)		(372	)
Valuation allowance		(61,637	)		(45,519	)
Net deferred tax asset	$	2,308		$	2,914

During 2012, the Company remained in a three year pre-tax cumulative loss position and can no longer support future profitability sufficient enough to realize all of its deferred tax assets in the near future.  The valuation allowance was $61,637,000 and $45,519,000 at December 31, 2012 and 2011, respectively.  At December 31, 2012, the Company’s net deferred tax asset after valuation allowance was $2,308,000 which consisted of U.S. foreign tax credits 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 and foreign net operating losses of $2,273,000 which is related to the pre-acquisition losses of Palladium, a French company, which has an unlimited carryforward period and therefore the Company believes it is more-likely-than-not that the loss carryforward will be utilized.  The ultimate realization of this loss carryforward is dependent upon the generation of future taxable income in France 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 France 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 uncertain tax positions were recognized in Other Liabilities on its Consolidated Balance Sheets and at December 31 was as follows (in thousands):

	2012			2011
Uncertain tax positions	$	7,827		$	7,112
Interest on uncertain tax positions		1,484			1,272
Total uncertain tax positions, gross		9,311			8,384
Less federal income tax benefit		(595	)		(568	)
Total uncertain tax positions, net	$	8,716		$	7,816

Income tax expense related to uncertain tax positions for the years ended December 31 was as follows (in thousands):

	2012		2011		2010
Income tax expense related to uncertain tax positions	$	715	$	810	$	137
Interest expense related to uncertain tax positions		212		228		141
Total income tax expense related to uncertain tax positions	$	927	$	1,038	$	278

The Company did not recognize any related penalties for uncertain tax positions for the years ended December 31, 2012, 2011 and 2010.  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 was as follows (in thousands):

	2012		2011
Beginning balance	$	8,384	$	7,346
Additions for uncertain tax positions:
Related to uncertain tax positions taken in the current year		715		810
Related to uncertain tax positions taken in prior years		212		228
Ending balance	$	9,311	$	8,384