Income Taxes

12 Months Ended

Dec. 31, 2011

Notes to Financial Statements

Income Taxes

9. Income Taxes

The Company is subject to income taxes in the United States and certain foreign jurisdictions. Judgment is required in determining the consolidated provision for income taxes and recording the related assets and liabilities.

The components of (loss) income from continuing operations before the provision for (benefit from) income taxes and other items for the years ended December 31, 2011 and 2010 were as follows (in thousands):

	2011			2010
Domestic	$	(3,512	)	$	3,548
Foreign		2,045			610
	$	(1,467	)	$	4,158

Significant components of the (benefit from) provision for income taxes for the years ended December 31, 2011 and 2010 were as follows (in thousands):

	2011			2010
Current:
Federal	$	(685	)	$	512
Foreign		218			769
State		10			315
Total current		(457	)		1,596
Deferred:
Federal		–			–
Foreign		643			(1,724	)
State		–			–
Total deferred		643			(1,724	)
	$	186		$	(128	)

The reconciliation of income tax provision (benefit) computed at the U.S. federal statutory tax rate to the effective tax rate of the Company’s tax provision (benefit) for the years ended December 31, 2011 and 2010 was as follows:

	2011			2010
U.S. statutory rate		(34.0	)%		34.0%
State income taxes, net of federal benefits		(14.5	)		3.7
Foreign tax rate difference		(2.5	)		(6.4	)
Tax credits		(19.2	)		(9.9	)
Valuation allowance		82.4			(55.7	)
Change in tax liability reserves		3.3			14.6
Expired net operating losses		1.4			17.1
Other		(4.2	)		(0.5	)
Effective tax rate		12.7%			(3.1	)%

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2011 and 2010 were as follows (in thousands):

	2011			2010
Deferred tax assets:
Inventory	$	512		$	448
Investments		3,300			3,682
Accruals and reserves		1,635			1,642
Environmental reserves		2,479			2,404
Postretirement benefit obligations		4,325			2,814
Depreciation and amortization		873			1,098
Net operating losses and credit carryforwards		3,397			2,150
Total deferred tax assets		16,521			14,238
Less valuation allowance		(12,537	)		(9,951	)
Net deferred tax assets		3,984			4,287
Deferred tax liabilities:
Depreciation and amortization		2,444			2,514
Postretirement benefit obligations		–			297
Total deferred tax liabilities		2,444			2,811
Net deferred tax asset	$	1,540		$	1,476

As of December 31, 2011, the Company had state net operating loss (“NOL”) carryforwards of $10.4 million and U.S. federal and state tax credit carryforwards of $1.4 million. The Company’s NOL’s and credit carryforwards have already begun to expire and will continue to expire through 2031. As of December 31, 2011, the Company had foreign NOL carryforwards of $4.2 million, which do not expire. Due to the uncertainty surrounding the realization of the Company’s domestic deferred tax assets and as a result of cumulative losses from its U.S. operations in recent years, the Company has provided a full valuation allowance against the Company’s domestic deferred tax assets. The valuation allowance related to these domestic deferred tax assets increased by $2.6 million during 2011.

The Company did not recognize any taxes in connection with the loss of its ownership interest in Congoleum (see Note 1), with the exception of a $55 thousand benefit that offset a 2007 capital gain. Such a loss is a capital loss, which can only be realized against capital gains. A benefit for the capital loss can be carried back for three years and carried forward for five years; however, the Company does not expect it will have any additional capital gains before the tax benefit from this loss expires. Consequently, a full valuation allowance has been recorded against the deferred tax asset.

As of December 31, 2010, the Company reversed the valuation allowance previously maintained against the AB Canada net deferred tax assets. The Company’s assessment was based upon its cumulative history of earnings before taxes for financial reporting purposes over a three year period and an assessment of its expected future results of operations for the Canadian operations as of December 31, 2010. As a result, the Company recognized net deferred tax assets of $1.5 million for AB Canada. As of December 31, 2011, AB Canada’s net deferred tax assets remained at $1.5 million.

Through December 31, 2011, the Company has not provided U.S. income taxes on approximately $21.3 million of unremitted foreign earnings because such earnings are intended to be indefinitely reinvested outside the U.S. It is not practical to estimate the amount of income taxes payable on the earnings that are indefinitely reinvested in foreign operations.

During the year ended December 31, 2010, the Company increased its liability for unrecognized tax benefits by $449 thousand for uncertain tax positions taken in 2010 and prior years. No adjustments were required during 2011. The Company also recorded additional interest and penalty expense of approximately $48 thousand and $184 thousand during 2011 and 2010, respectively, in connection with uncertain tax positions. As of December 31, 2011 and 2010, the Company had $419 thousand and $774 thousand of interest and penalties accrued, respectively. If the tax benefits are ultimately recognized, the effective tax rates in any future periods would be favorably affected by approximately $709 thousand. In addition, it is reasonably possible that during the next twelve month period, the Company’s liability for unrecognized tax benefits could decrease anywhere between zero and approximately $69 thousand relating to the settlement of audits.

A reconciliation of the allowance for uncertain tax positions for the years ended December 31, 2011 and 2010 is as follows (in thousands):

	2011		2010
Balance at January 1	$	1,559	$	1,110
Increase (decrease) for tax positions taken during    a prior year		–		401
Increase (decrease) for tax positions taken during    the current year		–		48
Decreases relating to settlements		–		–
Decrease resulting from the expiration of the    statute of limitations		–		–
Balance at December 31	$	1,559	$	1,559

The Company’s federal and state income tax returns are subject to examination for all tax years from 2005 to the present. However, the tax years in which losses arose may be subject to audit when such NOL and tax credit carryforwards are utilized to offset taxable income and tax liabilities in future periods. During 2010, AB Canada was audited by the Canadian Revenue Authority (“CRA”) for the years ending 2002 through 2007. In January 2011, the CRA notified AB Canada that certain amounts related to the Company’s management fees and AB Canada’s net operating loss carryforwards of a discontinued operation will be disallowed. In May and June 2011, AB Canada received formal assessments for 2002 through 2007. In June 2011, AB Canada filed notices of objection to the assessments; however, as required by the CRA, AB Canada also made a minimum payment of $2.1 million. The Company intends to vigorously defend its positions. The Company’s estimate of its potential liability is included in its allowance for uncertain tax positions; however, the outcome of the CRA audit is uncertain and therefore, the impact on the financial position and results of operations of the Company cannot be fully determined. If the CRA positions are sustained in full, the Company would recognize additional tax expense of approximately $3.6 million plus interest and penalties for these years.

During 2011 and 2010, the Company made payments for income taxes of $3.1 million and $1.3 million, respectively.