Income Taxes (Tables)

12 Months Ended

Dec. 31, 2012

For financial reporting purposes, income from continuing operations before income taxes includes the following components (in thousands):

	Year Ended December 31
	2012		2011		2010
Continuing operations
United States	$	46,388	$	51,542	$	41,516
Foreign		6,297		7,590		8,974
Income from continuing operations before income taxes	$	52,685	$	59,132	$	50,490

The provision for income taxes consists of the following (in thousands):

	Year Ended December 31
	2012			2011			2010
Continuing operations
Current provision:
Federal	$	9,306		$	16,874		$	12,576
State		1,988			3,043			2,226
Foreign		1,996			1,481			2,131
Total current provision		13,290			21,398			16,933
Deferred provision (benefit):
Federal		6,145			(1,901	)		(684	)
State		(730	)		(580	)		73
Foreign		391			420			327
Total deferred provision (benefit)		5,806			(2,061	)		(284	)
Total provision:
Federal		15,451			14,973			11,892
State		1,258			2,463			2,299
Foreign		2,387			1,901			2,458
Income tax provision on continuing operations		19,096			19,337			16,649
Income tax provision (benefit) on discontinued operations		3,796			(56	)		(518	)
Total tax provision	$	22,892		$	19,281		$	16,131

The Company's income tax provision is computed based on the domestic and foreign federal statutory rates and the average state statutory rates, net of related federal benefit.

The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before income taxes. A reconciliation of the provision for income taxes at the statutory federal income tax rate to the amount provided is as follows (in thousands):

	Year Ended December 31
	2012			2011				2010
Continuing operations
Tax at the statutory federal income tax rate	$	18,440			$	20,696			$	17,672
Qualified production activity deduction		(936	)			(1,201	)			(794	)
State income tax, net of federal income tax		714				1,601				1,494
Other permanent differences		360				370				272
Research and development tax credits		(420	)			(2,135	)			(1,849	)
Change in valuation allowance		1,035				63				222
Other items		(97	)			(57	)			(368	)
Income tax provision on continued operations		19,096				19,337				16,649
Income tax provision (benefit) on discontinued operations		3,796				(56	)			(518	)
Total tax provision	$	22,892			19,281				16,131

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 are as follows (in thousands):

	December 31
	2012			2011
Deferred tax assets:
Inventory reserves	$	3,696		$	8,468
Warranty reserves		2,891			3,868
Bad debt reserves		677			834
State tax loss carryforwards		2,052			1,706
Accrued vacation		1,795			1,819
SERP		1,179			1,177
Deferred compensation		789			855
Restricted stock units		2,960			3,836
Other		5,123			4,905
Valuation allowances		(3,065	)		(2,031	)
Total deferred tax assets		18,097			25,437
Deferred tax liabilities:
Property and equipment		18,909			20,262
Amortization		1,119			1,221
Goodwill		1,768			1,878
Pension		1,184			1,102
Other		--			101
Total deferred tax liabilities		22,980			24,564
Total net deferred tax asset (liability)	$	(4,883	)	$	873

As of December 31, 2012, the Company has state and foreign net operating loss carryforwards of $44,311,000 for tax purposes, which will be available to offset future taxable income. If not used, certain of these carryforwards will expire between 2013 and 2027. A significant portion of the valuation allowance for deferred tax assets relates to the future utilization of state and foreign net operating loss carryforwards. Future utilization of these net operating loss carryforwards is evaluated by the Company on a periodic basis and the valuation allowance is adjusted accordingly. In 2012, the valuation allowance on these carryforwards was increased by $1,040,000 due to uncertainty about whether certain entities will realize their state net operating loss carryforwards. The Company has also determined that the recovery of certain other deferred tax assets is uncertain. The valuation allowance for these deferred tax assets was decreased by $6,000.

Undistributed earnings of the Company's Canadian subsidiary, Breaker Technology Ltd., are considered to be indefinitely reinvested; accordingly, no provision for U.S. federal and state income taxes has been provided thereon. Upon repatriation of those earnings, in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to Canada. There are no undistributed earnings applicable to Breaker Technology, Ltd. as of December 31, 2012.

The Company files income tax returns in the U.S. federal jurisdiction, and in various state and foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examinations by authorities for years prior to 2009. With few exceptions, the Company is no longer subject to state and local or non-U.S. income tax examinations by authorities for years prior to 2006.

The Company has a liability for unrecognized tax benefits of $771,000 and $749,000 (excluding accrued interest and penalties) as of December 31, 2012 and 2011, respectively. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in tax expense. The Company recognized tax costs of $82,000 and $118,000 in 2012 and 2011, respectively, for interest charges related to amounts of unrecognized tax benefits. The net total amount of unrecognized tax benefits that, if recognized, would affect the Company's effective tax rate is $864,000 and $807,000 at December 31, 2012 and 2011, respectively. The Company does not expect a significant increase or decrease to the total amount of unrecognized tax benefits within the next twelve months.

A reconciliation of the beginning and ending unrecognized tax benefits excluding interest and penalties is as follows (in thousands):

	Year Ended December 31
	2012			2011			2010
Balance, beginning of year	$	749		$	488		$	578
Additions for tax positions related to the current year		5			150			110
Additions for tax positions related to prior years		90			192			75
Reductions due to lapse of statutes of limitations		(73	)		(81	)		(103	)
Decreases related to settlements with tax authorities		--			--			(172	)
Balance, end of year	$	771		$	749		$	488

The December 31, 2012 balance of unrecognized tax benefits includes no tax positions for which the ultimate deductibility is highly certain but the timing of such deductibility is uncertain. Accordingly, there is no impact to the deferred tax accounting for certain tax benefits.

Provision for income tax

The provision for income taxes consists of the following (in thousands):

	Year Ended December 31
	2012			2011			2010
Continuing operations
Current provision:
Federal	$	9,306		$	16,874		$	12,576
State		1,988			3,043			2,226
Foreign		1,996			1,481			2,131
Total current provision		13,290			21,398			16,933
Deferred provision (benefit):
Federal		6,145			(1,901	)		(684	)
State		(730	)		(580	)		73
Foreign		391			420			327
Total deferred provision (benefit)		5,806			(2,061	)		(284	)
Total provision:
Federal		15,451			14,973			11,892
State		1,258			2,463			2,299
Foreign		2,387			1,901			2,458
Income tax provision on continuing operations		19,096			19,337			16,649
Income tax provision (benefit) on discontinued operations		3,796			(56	)		(518	)
Total tax provision	$	22,892		$	19,281		$	16,131

Reconciliation of provision for income taxes at the statutory federal income tax rate

	Year Ended December 31
	2012			2011				2010
Continuing operations
Tax at the statutory federal income tax rate	$	18,440			$	20,696			$	17,672
Qualified production activity deduction		(936	)			(1,201	)			(794	)
State income tax, net of federal income tax		714				1,601				1,494
Other permanent differences		360				370				272
Research and development tax credits		(420	)			(2,135	)			(1,849	)
Change in valuation allowance		1,035				63				222
Other items		(97	)			(57	)			(368	)
Income tax provision on continued operations		19,096				19,337				16,649
Income tax provision (benefit) on discontinued operations		3,796				(56	)			(518	)
Total tax provision	$	22,892			19,281				16,131

Significant components of company's deferred tax assets and liabilities

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

	December 31
	2012			2011
Deferred tax assets:
Inventory reserves	$	3,696		$	8,468
Warranty reserves		2,891			3,868
Bad debt reserves		677			834
State tax loss carryforwards		2,052			1,706
Accrued vacation		1,795			1,819
SERP		1,179			1,177
Deferred compensation		789			855
Restricted stock units		2,960			3,836
Other		5,123			4,905
Valuation allowances		(3,065	)		(2,031	)
Total deferred tax assets		18,097			25,437
Deferred tax liabilities:
Property and equipment		18,909			20,262
Amortization		1,119			1,221
Goodwill		1,768			1,878
Pension		1,184			1,102
Other		--			101
Total deferred tax liabilities		22,980			24,564
Total net deferred tax asset (liability)	$	(4,883	)	$	873

Reconciliation of unrecognized tax benefit

A reconciliation of the beginning and ending unrecognized tax benefits excluding interest and penalties is as follows (in thousands):

	Year Ended December 31
	2012			2011			2010
Balance, beginning of year	$	749		$	488		$	578
Additions for tax positions related to the current year		5			150			110
Additions for tax positions related to prior years		90			192			75
Reductions due to lapse of statutes of limitations		(73	)		(81	)		(103	)
Decreases related to settlements with tax authorities		--			--			(172	)
Balance, end of year	$	771		$	749		$	488

- Definition

Tabular disclosure of tax positions taken in the tax returns filed or to be filed for which it is more likely than not that the tax position will not be sustained upon examination by taxing authorities (i.e., uncertain tax positions) and other types of income tax contingencies, including: (1) the policy on classification of interest and penalties; (2) a tabular reconciliation of the total amounts of unrecognized tax benefits at the beginning and end of the period; the total amount(s) of: (3) unrecognized tax benefits that, if recognized, would affect the effective tax rate, and (4) interest and penalties recognized in each of the income statement and balance sheet; (5) for positions for which it is reasonably possible that the total amounts unrecognized will significantly change within 12 months of the reporting date the: (i) nature of the uncertainty, (ii) nature of the event that could occur that would cause the change, and (iii) an estimate of the range of the reasonably possible change or a statement that an estimate of the range cannot be made; and (6) a description of tax years that remain subject to examination by major tax jurisdictions.

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