Income Tax

9 Months Ended

Sep. 30, 2011

Income Tax [Abstract]

Income Tax

6. Income Tax

The Company calculates its interim tax provision in accordance with the provisions of ASC 740-270 “Income Taxes — Interim Reporting.” For each interim period the Company estimates its annual effective income tax rate and applies the estimated rate to its year-to-date income or loss before income taxes. The Company also computes the tax provision or benefit related to items separately reported, such as discontinued operations, and recognizes the items net of their related tax effect in the interim periods in which they occur. The Company also recognizes the effect of changes in enacted tax laws or rates in the interim periods in which the changes occur.

For the nine-months ended September 30, 2011 and September 30, 2010, the effective income tax rate from continuing operations was 31% and 32%, respectively. Effective January 1, 2011, the Company’s statutory federal income tax rate increased from 34% to 35%. The impact of the rate change on deferred taxes decreased income tax expense and the effective income tax rate.

The Company has recorded gross unrecognized tax benefits, excluding interest and penalties, as of September 30, 2011 and December 31, 2010 of $999,000 and $2,358,000, respectively. The decrease in gross unrecognized tax benefits was primarily due to a favorable settlement with a foreign tax authority and the decrease of certain tax positions due to the expiration of the statute of limitations. Tax benefits are recorded pursuant to the provisions of ASC 740 “Income Taxes.” If such unrecognized tax benefits are ultimately recorded in any period, the Company’s effective tax rate would be adjusted accordingly for such period.

The Company has been examined by the Internal Revenue Service (the “IRS”) for periods up to and including the calendar year 2004. During the third quarter of 2011 the Company was contacted by the IRS to examine the calendar year 2009. The examination is expected to begin in November 2011.

It is reasonably possible that the Company’s gross unrecognized tax benefits balance may change within the next twelve months due to the expiration of the statutes of limitation of the federal government and various state governments by a range of zero to $236,000. The Company records such unrecognized tax benefits upon the expiration of the applicable statute of limitations. As of September 30, 2011, the Company has a liability for unrecognized benefits of $345,000 and $654,000 for federal and state taxes, respectively. Such benefits relate primarily to expenses incurred in those jurisdictions.

The Company classifies interest and penalties related to unrecognized tax benefits as income tax expense. At September 30, 2011, the Company has accrued approximately $82,000 for the payment of interest and penalties. At December 31, 2010, the Company has accrued approximately $301,000 for the payment of interest and penalties.

During the nine-months ended September 30, 2011, the Company recorded additional benefits from research and development tax credits of $582,000. As of September 30, 2011, the Company’s gross research and development tax credit carry forwards totaled approximately $1,118,000. Of these credits, approximately $522,000 can be carried forward for 15 years and will expire between 2013 and 2026, and approximately $596,000 can be carried forward indefinitely. As of September 30, 2011, the Company’s gross foreign tax credits totaled approximately $30,000. These credits can be carried forward for ten years and will expire in 2021.

During the second quarter of 2011 the Company reached a settlement with a foreign tax authority which was recorded as part of discontinued operations. The settlement was associated with the Company’s Elektro-Metall Export GmbH subsidiary, which was sold in January 2003. As a result, during the second quarter of 2011, the Company recognized income of $787,000 ($619,000 tax and $168,000 interest) from a previously unrecognized tax position related to the settlement.