INCOME TAXES

The Company files a consolidated U.S. federal income tax return. State tax returns are filed on a consolidated, combined or separate basis depending on the applicable laws relating to the Company and its domestic subsidiaries. Additionally, the Company files tax returns in England and France.

The Company’s income from continuing operations before provision for income taxes was generated from the U.S. and foreign operations for the years ended December 31 as follows (in thousands):



	2011			2010
Earnings (loss) before income taxes:
U.S.	$	(3,295	)	$	(6,109	)
Foreign	1,335			795
Earnings (loss) before income taxes	$	(1,960	)	$	(5,314	)

The Company’s provision for income taxes on continuing operations consisted of the following for the years ended December 31 (in thousands):



	2011			2010
Current:
Federal	$	(238	)	$	(832	)
State	21			(74		)
Foreign	300			72
Total current	83			(834		)
Deferred:
Federal	11			1,090
State	1			159
Foreign	(7		)	168
Total deferred	5			1,417
Total provision for income taxes	$	88		$	583

Income tax expense (benefit) on continuing operations differed from the amount obtained by applying the statutory federal income tax rate of 34% to income before income taxes as follows for the years ended December 31 (in thousands):



	2011			2010
Federal income tax at statutory rates	$	(668	)	$	(1,662	)
State income taxes, net of federal benefit	22			56
Foreign income taxes	(161		)	(30		)
Changes in valuation allowances	897			1,535
Foreign income inclusion - IRC 956	144			180
Permanent differences	2			259
Additional valuation allowance required due to sale of discontinued operations	—			1,090
Tax benefit from income of discontinued operations	(227		)	(896		)
Expiration of research and development credits	79			—
Other	—			51
	$	88		$	583

Tax benefit from income of discontinued operations represents the tax benefit of domestic losses in continuing operations that were recognized for accounting purposes due to domestic income reported within discontinued operations.

The Company’s business is subject to regulation under a wide variety of U.S. federal, state and foreign tax laws, regulations and policies. The majority of the Company’s foreign subsidiaries have earnings and profits that are reinvested indefinitely. However, under the PEM Credit Agreement described in Note 9, the foreign subsidiaries have issued guarantees on the credit facility and, as a result, under the Code §956, have been deemed to have distributed these earnings to fund U.S. operations. This has resulted in U.S. federal taxable income and an increase in U.S. tax liability, which has been reduced through utilization of available net operating loss carryforwards and foreign tax credits.

The Company had federal and state net operating loss carryforwards of approximately $14.8 million as of December 31, 2011 which expire at various dates beginning in 2012 through 2018. As of December 31, 2011 and 2010, the Company recorded a valuation allowance on the deferred tax asset. Management believes sufficient uncertainty exists regarding the realizability of the deferred tax asset items and that a valuation allowance is required. Management considers projected future taxable income and tax planning strategies in making this assessment. The amount of the deferred tax assets considered realizable, however, could materially change in the near future if estimates of future taxable income during the carryforward period are changed.

Utilization of the Company’s net operating loss and tax credit carryforwards are subject to a substantial annual limitation due to the ownership change limitations provided by the Code and similar state provisions. Such an annual limitation could result in the expiration or elimination of the net operating loss and tax credit carryforwards before utilization. As a result of a merger in 1997, the Company experienced a more than 50% ownership change for federal income tax purposes. Of the pre-1997 net operating loss carryforwards subject to limitation, approximately $276,000 per year is available to offset future federal taxable income.

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 were as follows as of December 31 (in thousands):



	2011			2010
Current deferred tax assets:
Allowance for doubtful accounts	$	4		$	10
Inventory reserves and uniform capitalization	415			584
Other accrued liabilities	217			247
	636			841
Valuation allowance-current deferred tax assets	(612		)	(805		)
Total current deferred tax assets	24			36
Long-term deferred tax assets:
Depreciation on property, plant & equipment	288			303
Non-qualified stock option expense	9			—
Deferred compensation	208			226
Deferred income	7			33
Tax credits	156			235
Alternative minimum tax credit carryforwards	106			248
Foreign tax credit carryforwards	—			939
Net operating loss carryforwards	5,333			3,730
Capital loss carryforwards	—			830
Other, net	49			8
	6,156			6,552
Valuation allowance-long-term deferred tax assets	(5,929		)	(6,293		)
Total long-term deferred tax assets	227			259
Deferred tax liabilities:
Intangible assets other than goodwill	(89		)	(141		)
Total deferred tax liabilities (long-term)	(89		)	(141		)
Net deferred tax assets (liabilities)	$	162		$	154

The Company adopted FASB guidance for accounting for uncertainty in income taxes on January 1, 2007. The implementation of this guidance did not result in a material adjustment to the Company’s liability for unrecognized income tax benefits. At the time of adoption and as of December 31, 2011, the Company had recorded no net unrecognized tax benefits. The Company currently has no open matters with tax authorities nor is it engaged in an examination by any tax authority. The Company recognizes interest and penalties related to uncertain tax positions in interest expense and selling, general and administrative expense, respectively, in the condensed consolidated statements of operations and comprehensive income. No interest or penalties were recognized during 2011. As of December 31, 2011, the Company had nothing accrued for interest and penalties.

The Company files income tax returns in the United States federal jurisdiction, the United Kingdom and France, and in the state jurisdictions of California, Texas, Pennsylvania and New Jersey. The Company is no longer subject to United States federal and state tax examinations for years before 2008 and 2007, respectively, and is no longer subject to tax examinations for the United Kingdom for years prior to 2010, and for France for years prior to 2008.