Income taxes

The significant components of the provision for (benefit from) income taxes for each of the three years in the period ended December 31, 2011 are as follows (in thousands):

	2011			2010			2009
Current income tax expense:
Foreign	$	2,129		$	1,134		$	1,476
Federal		48			-			55
State and local		12			7			27
		2,189			1,141			1,558
Deferred income tax benefit:
Foreign		-			(234	)		-
Federal		(352	)		(1,180	)		(496	)
State and local		(476	)		(195	)		(95	)
		(828	)		(1,609	)		(591	)

Provision for (benefit from) income taxes	$	1,361		$	(468	)	$	967

The reconciliation of the U.S. statutory rate with the Company’s effective tax rate for each of the three years ended December 31, 2011 is summarized as follows:

	2011			2010			2009

Federal statutory rate		34.0	%		(34.0	)%		34.0	%
Effect of:
State income taxes (net of federal tax benefit)		3.0			(3.0	)		3.5
Taxes on foreign income at rates that differ from U.S. statutory rate		(18.3	)		(29.0	)		(9.2	)
Reversal of deferred tax liability relating to unrepatriated foreign earnings		-			-			(23.9	)
Change in valuation allowance on deferred tax assets		-			(19.2	)		0.8
Increase in unrecognized tax benefits		9.0			45.7			7.5
Other		(1.9	)		1.0			(1.0	)
Effective tax rate		25.8	%		(38.5	)%		11.7	%

No tax benefits related to stock option exercises were recorded for each of the three years in the period ended December 31, 2011, due to net operating loss carryforwards.

Deferred tax assets and liabilities are classified as current or non-current according to the classification of the related asset or liability. Significant components of the Company’s deferred tax assets and liabilities as of December 31, are as follows (in thousands):

	2011			2010

Deferred income tax assets:
Allowances not currently deductible	$	449		$	713
Depreciation and amortization		376			418
Equity compensation not currently deductible		548			282
Net operating loss carryforwards		2,546			1,811
Expenses not deductible until paid		1,055			865
Tax credit carryforwards		176			220
Derivatives		659			-
Other		11			69
Total gross deferred income tax assets before valuation allowance		5,820			4,378
Valuation allowance		-			-
Net deferred income tax assets		5,820			4,378
Deferred income tax liabilities:
Derivatives		-			(483	)
Other		(162	)		(146	)
Totals		(162	)		(629	)

Net deferred tax assets	$	5,658		$	3,749

Net deferred income tax asset-current	$	1,934		$	1,581
Net deferred income tax asset-long term		3,886			2,797
Net deferred income tax liability-current		(9	)		(492	)
Net deferred income tax liability-non-current		(153	)		(137	)

Net deferred income tax assets	$	5,658		$	3,749

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that all or some portion of the deferred tax assets will not be realizable. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences are deductible and net operating losses are available. At December 31, 2011 and 2010, the Company had no valuation allowance on its deferred tax assets.

The Company had previously recorded a deferred tax liability on approximately $5.1 million of foreign earnings, which it intended to remit to the U.S. These earnings represent a portion of the Company’s foreign profits earned prior to 2002. In 2009, the Company made a reassessment on the remittances of such foreign earnings and determined that these earnings will be indefinitely reinvested in its foreign subsidiaries. As a result of the change in assertion, the Company reduced its deferred tax liabilities related to undistributed foreign earnings by approximately $2.0 million. Beginning in 2002, unremitted earnings of foreign subsidiaries have been included in the consolidated financial statements without giving effect to the United States taxes that may be payable on distribution to the United States, because such earnings are not anticipated to be remitted to the United States. Undistributed earnings of foreign subsidiaries amount to $24.0 million at December 31, 2011. These earnings are considered to be indefinitely reinvested, and accordingly, no provision for U.S. federal or state income taxes has been made.

United States and foreign components of income (loss) before income taxes for each of the three years ended December 31, (in thousands) are as follows:

	2011			2010			2009

United States	$	(2,476	)	$	(3,852	)	$	3,919
Foreign		7,747			2,637			4,361

Total	$	5,271		$	(1,215	)	$	8,280

Certain of the Company’s foreign subsidiaries are subject to preferential tax rates. In addition, one of the foreign subsidiaries enjoys tax holiday. Due to the tax holiday and the preferential tax rates, the income tax rate for the Company was substantially reduced, the tax benefit from which was approximately $1.1 million, $0.1 million and $0.2 million for each of the three years in the period ended December 31, 2011, respectively.

At December 31, 2011, the Company has available U.S. federal and New Jersey state net operating loss carryforwards of approximately $10.6 million and $12.2 million, respectively. These net operating loss carryforwards expire at various times through 2031. Stock option exercises resulted in tax deductions in excess of previously recorded benefits based on the option value at the time of grant (a “windfall”). Although these benefits were reflected in the net operating losses, the additional tax benefit associated with the windfall is not recognized until the deduction reduces taxes payable. Accordingly, since the tax benefit did not reduce the current taxes payable due to net operating losses, these windfall tax benefits were not reflected in the deferred tax assets for 2011 and 2010. Windfalls included in net operating losses but not reflected in deferred tax assets as of December 31, 2011 were approximately $4.0 million.

The Company had unrecognized tax benefits of $2.3 million and $1.8 million at December 31, 2011 and 2010, respectively. The portion of unrecognized tax benefits relating to interest and penalties was $0.5 million and $0.4 million at December 31, 2011 and 2010, respectively. The unrecognized tax benefits as of December 31, 2011 and 2010, if recognized, would have an impact on the Company’s effective tax rate.

The following table represents a roll forward of the Company’s unrecognized tax benefits and associated interest during the years then ended (amounts in thousands):

	December 31,
	2011		2010

Balance at beginning of year	$	1,827	$	1,303
Increases for tax position in prior years		317		445
Decrease for tax position in prior years		—		(5	)
Interest accrual		134		84
Balance at end of year	$	2,278	$	1,827

The Company is subject to U.S. federal income tax as well as income tax in various states and foreign jurisdictions. The Company is no longer subject to examination by federal and New Jersey taxing authorities for years prior to 2006. Various foreign subsidiaries currently have open tax years ranging from 2004 through 2010.

Pursuant to an income tax audit by the Indian Bureau of Taxation in March 2006, one of the Company’s Indian subsidiaries received a tax assessment approximating $339,000, including interest, through December 31, 2011, for the fiscal tax year ended March 31, 2003. Management disagreed with the basis of the tax assessment and filed an appeal with the Appeal Officer against the assessment. In October 2010, the matter was resolved with a judgment in the Company’s favor. Under the Indian Income Tax Act, however, the income tax assessing officer has a right to appeal against the judgment passed by the Appeal Officer. In December 2010, the income tax assessing officer exercised this right, against which the Company has filed an application to defend the case and the Company intends to contest it vigorously. The Indian Bureau of Taxation has also completed an audit of the Company’s Indian subsidiary’s income tax return for the fiscal tax year ended March 31, 2004. The ultimate outcome was favorable, and there was no tax assessment imposed for the fiscal tax year ended March 31, 2004. As of December 31, 2008 and 2009, the Indian subsidiary received a final tax assessment for the fiscal years ended March 31, 2005 and 2006 from the Indian Bureau of Taxation approximating $340,000 and $345,000, respectively, including interest through December 31, 2011. Management disagrees with the basis of these tax assessments, have filed an appeal against the assessments, which it is contesting vigorously. In January 2012, the Indian subsidiary received a final tax assessment approximately $1.1 million, including interest, through December 31, 2011, for the fiscal year ended March 31, 2008 from the Indian Bureau of Taxation. Management disagrees with the basis of this tax assessment, and has filed an appeal against the assessment. Due to this assessment, the Company recorded a tax provision amounting to $295,000 including interest through December 31, 2011. Based on recent experience and current development, management believes that the tax provision of $295,000 including interest is adequate. As the Company is continually subject to tax audits by the Indian Bureau of Taxation, the Company assessed the likelihood of an unfavorable assessment for all fiscal years where the Company is not subject to a final tax assessment as of December 31, 2011, and recorded an additional tax provision amounting to approximately $0.9 million including interest through December 31, 2011. The Indian Bureau of Taxation commenced an audit of this subsidiary’s income tax return for the fiscal year ended March 31, 2009. The ultimate outcome cannot be determined at this time.