INCOME TAXES

a. Income (Loss) Before Income Taxes

The consolidated income (loss) before income taxes for 2011, 2010 and 2009 consists of the following (in thousands):


	2011		2010			2009
Domestic	$	15,213	$	(141,867	)	$	(104,769	)
Foreign		—		56			3
Total income (loss) before income taxes	$	15,213	$	(141,811	)	$	(104,766	)

b. Income Tax Expense (Benefit)

The consolidated income tax expense (benefit) for 2011, 2010 and 2009 consists of the following components (in thousands):


	2011		2010			2009
Current
U.S. Federal	$	14	$	(163	)	$	(127	)
State		157		112			32
Deferred		—		—			(2,906	)
Total consolidated expense (benefit)	$	171	$	(51	)	$	(3,001	)

The Company’s following table provides a reconciliation of differences from the U.S. Federal statutory rate of 35% as follows (in thousands):


	2011			2010			2009
Pretax book income (loss)	$	15,213		$	(141,811	)	$	(104,766	)
Federal tax expense (benefit) at 35% statutory rate		5,325			(49,634	)		(36,668	)
State and local income taxes		917			(6,981	)		(5,205	)
(Utilization of) Provisions for valuation allowance for net operating losses and credit carrryforwards – U.S. and states		(6,060	)		7,604			23,944
Effect of non-deductible adjustment to fair market value of warrants		—			48,635			13,379
Effect of non-deductible stock-based compensation		—			395			868
Other		(11	)		(70	)		681
Total income tax expense (benefit)	$	171		$	(51	)	$	(3,001	)

The $3.0 million income tax benefit for the year ended December 31, 2009 was substantially associated with a change in the tax law which permitted the Company to recover U.S. federal alternative minimum taxes paid in 2004, 2005 and 2006 of $2.9 million against which the Company previously had recorded a full valuation allowance.

c. Deferred Taxes

The Company’s deferred income taxes are primarily due to temporary differences between financial and income tax reporting for the depreciation of property, plant and equipment, amortization of intangibles, compensation adjustments, inventory adjustments, other accrued liabilities and tax credits and losses carried forward.

Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. During 2011, the Company utilized approximately $6.1 million of previously recognized net valuation allowances primarily due to accumulation of pretax income. In 2010 the Company recorded a $7.6 million net valuation allowance. Companies are required to assess whether valuation allowances should be established against their deferred tax assets based on the consideration of all available evidence, both positive and negative, using a “more likely than not” standard. In making such judgments, significant weight is given to evidence that can be objectively verified.

The Company assesses, on a quarterly basis, the realizability of its deferred tax assets by evaluating all available evidence, both positive and negative, including: (1) the cumulative results of operations in recent years, (2) the nature of recent losses, (3) estimates of future taxable income, (4) the length of operating loss carryforward periods and (5) the uncertainty associated with a possible change in ownership, which imposes an annual limitation on the use of these carryforwards. The Company has been in a cumulative three-year pre-tax loss position since the quarter ended December 31, 2009. The cumulative three-year loss is considered significant negative evidence which is objective and verifiable. Positive evidence considered by the Company in its assessment included lengthy operating loss carryforward periods, a lack of unused expired operating loss carryforwards in the Company’s history and estimates of future taxable income. However, there is uncertainty as to the Company’s ability to meet its estimates of future taxable income in order to recover its deferred tax assets in the United States.

After considering both the positive and negative evidence management determined that it was not more-likely-than-not that it would realize the value of its deferred tax assets. As a result, the Company established a full valuation allowance against its net deferred tax assets as of December 31, 2011, 2010 and 2009. In subsequent periods, the Company will continue to evaluate the deferred income tax asset valuation allowance and adjust the allowance when management has determined that it is more-likely than not, after considering both the positive and negative evidence, that the realizability of the related deferred tax assets, or a portion thereof, has changed.

As of December 31, 2011, the Company has U.S. federal tax net operating loss carryforwards (“NOLs”) of approximately $166 million, which will expire beginning in 2022, if unused, and which may be subject to other limitations under Internal Revenue Service (the “IRS”) rules. The Company has various, multistate income tax net operating loss carryforwards, which have been recorded as a deferred income tax asset, of approximately $16 million, before valuation allowances. The Company also has various U.S. federal income tax credit carryforwards, which will expire beginning in 2013, if unused. The Company’s NOLs, including any future NOLs that may arise, are subject to limitations on use under the IRS rules, including Section 382 of the Internal Revenue Code of 1986 (“Section 382”), as revised. Section 382 limits the ability of a company to utilize NOLs in the event of an ownership change. The Company would undergo an ownership change if, among other things, the stockholders, or group of stockholders, who own or have owned, directly or indirectly, 5% or more of the value of the Company’s stock or are otherwise treated as 5% stockholders under Section 382 and the regulations promulgated thereunder increase their aggregate percentage ownership of the Company’s stock by more than 50 percentage points over the lowest percentage of its stock owned by these stockholders at any time during the testing period, which is generally the three-year period preceding the potential ownership change.

In the event of an ownership change, Section 382 imposes an annual limitation on the amount of post-ownership change taxable income a corporation may offset with pre-ownership change NOLs and certain recognized built-in losses. The limitation imposed by Section 382 for any post-change year would be determined by multiplying the value of our stock immediately before the ownership change (subject to certain adjustments) by the applicable long-term tax-exempt rate in effect at the time of the ownership change. Any unused annual limitation may be carried over to later years, and the limitation may under certain circumstances be increased by built-in gains that may be present in assets held by us at the time of the ownership change that are recognized in the five-year period after the ownership change. It is expected that any loss of the Company’s NOLs would cause its effective tax rate to go up significantly if the Company sustains its profitability, excluding impacts of valuation allowance.

On May 28, 2010 a change of ownership did occur resulting from the issuance of 11,750,000 shares of common stock, which invoked a limitation on the utilization of pre-ownership change U.S. Federal NOLs under Section 382. Pre-ownership change U.S. Federal NOLs at December 31, 2011 are $154 million. Management has estimated the annual U.S. Federal NOL limitations under IRC Section 382 through 2014 are $95 million for 2012, $40 million for 2013 and $19 million for 2014. To the extent the limitation in any year is not reached, any remaining limitation can be carried forward indefinitely to future years. Post-ownership change U.S. Federal NOLs at December 31, 2011 are $12 million, which is currently not subject to utilization limits.

The components of deferred tax assets and deferred tax liabilities as of December 31, 2011 and 2010 were as follows (in thousands):


	2011			2010
Deferred tax assets
Tax credits and loss carryforwards	$	75,836		$	81,808
Accrued liabilities		4,952			5,518
Incentive compensation		8,988			7,439
Other		5,800			7,097
	$	95,576		$	101,862
Deferred tax liabilities
Property, plant and equipment		(828	)		(1,687	)
Intangibles		(3,421	)		(2,766	)
Prepaid assets		(413	)		—
Other		(242	)		(525	)
	$	(4,904	)	$	(4,978	)
Net deferred tax asset before valuation allowances and reserves	$	90,672		$	96,884
Valuation allowances		(81,267	)		(87,479	)
Uncertain tax positions		(9,405	)		(9,405	)
Net deferred tax asset	$	—		$	—

d. Tax Reserves

The Company’s policy with respect to interest and penalties associated with reserves or allowances for uncertain tax positions is to classify such interest and penalties in income tax expense in the Statements of Operations. As of December 31, 2011 and 2010, the total amount of unrecognized income tax benefits was approximately $10.1 million, all of which, if recognized, would impact the effective income tax rate of the Company. As of December 31, 2011 and 2010, the Company had recorded a total of $0.6 million and $0.5 million, respectively, of accrued interest and penalties related to uncertain tax positions. The Company foresees no significant changes to the facts and circumstances underlying its reserves and allowances for uncertain income tax positions as reasonably possible during the next 12 months. As of December 31, 2011, the Company is subject to unexpired statutes of limitation for U.S. federal income taxes for the years 2002 through 2011. The Company is also subject to unexpired statutes of limitation for Indiana state income taxes for the years 2002 through 2011.

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


Balance at January 1, 2010	$	10,080
Increase in prior year tax positions		15
Balance at December 31, 2010	$	10,095
Balance at December 31, 2011	$	10,095