Income Taxes

3 Months Ended

Dec. 31, 2012

Income Taxes

Income Taxes

8. Income Taxes

Headwaters’ estimated effective income tax rate for the fiscal year ending September 30, 2013, exclusive of discrete items, is currently expected to be approximately 12%, which estimated rate was used to record income taxes for the December 2012 quarter. Headwaters did not recognize any discrete items in the quarter. For the December 2011 quarter, Headwaters used an estimated effective income tax rate of negative (14)%, excluding approximately $0.6 million of income tax benefit for discrete items.

Beginning in fiscal 2011, Headwaters has recorded a full valuation allowance on its net amortizable deferred tax assets, a situation that is expected to continue throughout fiscal 2013. Accordingly, Headwaters does not expect to recognize benefit for tax credit carryforwards or net operating loss (NOL) carryforwards in fiscal 2013 except to the extent of projected fiscal 2013 earnings. A valuation allowance is required when there is significant uncertainty as to the realizability of deferred tax assets. Because the realization of Headwaters’ deferred tax assets is dependent upon future income in domestic and foreign jurisdictions that have generated losses, management determined that Headwaters does not meet the “more likely than not” threshold that NOLs, tax credits and deferred tax assets will be realized. Accordingly, a valuation allowance is required.

The estimated effective income tax rate for fiscal 2013 of 12% is due primarily to the combination of recognizing benefit for NOL carryforwards only to the extent of projected fiscal 2013 earnings, plus current state income taxes in certain state jurisdictions and federal alternative minimum tax. The estimated effective income tax rate for fiscal 2012 of negative (14)% was due primarily to the combination of not recognizing benefit for expected pre-tax losses and tax credits, but recognizing current state income taxes in certain state jurisdictions where Headwaters expected to generate taxable income. As of December 31, 2012, Headwaters’ NOL and capital loss carryforwards totaled approximately $74.5 million (tax effected). The U.S. and state NOLs and capital losses expire from 2013 to 2033. Substantially all of the non-U.S. NOLs, which are not material, do not expire. In addition, there are approximately $24.6 million of tax credit carryforwards as of December 31, 2012, which expire from 2014 to 2033.

The calculation of tax liabilities involves uncertainties in the application of complex tax regulations in multiple tax jurisdictions. Headwaters currently has open tax years subject to examination by the IRS or other taxing authorities for the years 2009 through 2011. Headwaters recognizes potential liabilities for anticipated tax audit issues in the U.S. and state tax jurisdictions based on estimates of whether, and the extent to which, additional taxes and interest will be due. If events occur (or do not occur) as expected and the payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when it is determined the liabilities are no longer required to be recorded in the consolidated financial statements. If the estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result. It is reasonably possible that approximately $2.0 million to $3.5 million of Headwaters’ unrecognized income tax benefits, primarily related to discontinued operations, will be released within the next 12 months, depending on the timing of ongoing examinations, the expiration of statute of limitation time periods and other factors.