Income Taxes

The components of the provision (benefit) for income taxes are as follows:



	Year Ended September 30,
	2014			2013			2012
	(dollars in thousands)
Current:
United States	$	370		$	(150	)	$	2,440
Foreign	530			800			(9,380		)
State	80			(110		)	(90		)
Total current	980			540			(7,030		)

Deferred:
United States	(490		)	(290		)	—
Foreign	750			1,610			1,700
State	—			—			10
Total deferred	260			1,320			1,710
Total provision (benefit)	$	1,240		$	1,860		$	(5,320	)

A reconciliation of actual income taxes to income taxes at the expected United States federal corporate income tax rate of thirty-four percent is as follows:



	Year Ended September 30,
	2014			2013			2012
	(dollars in thousands)
Tax provision (benefit) at the U.S. rate	$	(4,440	)	$	(6,750	)	$	(11,190	)
Effect of permanent book-tax differences	30			970			2,010
State tax provision	80			(110		)	(80		)
Valuation allowance for net deferred tax assets	3,900			5,850			1,740
Uncertain tax items	370			450			(240		)
Expiration of foreign net operating loss	—			—			2,320
Difference between U.S. and foreign rates	1,000			1,440			—
Other items	300			10			120
	$	1,240		$	1,860		$	(5,320	)

Deferred income taxes reflect the tax effects of temporary differences between the carrying value of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of temporary book-tax differences that give rise to significant portions of the deferred tax assets and deferred tax liability are as follows:



	Year Ended September 30,
	2014			2013			2012
	(dollars in thousands)
Deferred tax assets - current:
Capitalized inventory costs	$	230		$	130		$	90
Inventory write-downs	950			620			600
Accrued warranty	180			200			20
Deferred profits	1,460			800			2,510
Accruals and reserves not currently deductible	520			490			240
Deferred tax assets - current	$	3,340		$	2,240		$	3,460
Valuation allowance	(2,280		)	(910		)	—
Deferred tax assets - current net of valuation allowance	$	1,060		$	1,330		$	3,460

Deferred tax assets (liabilities)- non-current:
Stock option expense	$	670		$	700		$	470
Book vs. tax basis of acquired assets	(1,210		)	(1,130		)	(1,280		)
Federal net operating loss caryforwards	900			—			—
Foreign and state net operating losses	8,070			9,000			3,640
Book vs. tax depreciation and amortization	(10		)	60			100
Foreign tax credits	—			520			—
Other deferred tax assets	2,950			(350		)	140
Total deferred tax assets - non-current	11,370			8,800			3,070
Valuation allowance	(10,070		)	(7,540		)	(2,600		)
Deferred tax assets (liabilities) - non-current, net of valuation allowance	$	1,300		$	1,260		$	470

Changes in the deferred tax valuation allowance are as follows:



	Year Ended September 30,
	2014		2013		2012
	(dollars in thousands)
Balance at the beginning of the year	$	8,450	$	2,600	$	860
Additions to valuation allowance	3,900		5,850		1,740
Balance at the end of the year	$	12,350	$	8,450	$	2,600

The deferred tax valuation allowance increased by $3.9 million and by $5.9 million for the years ended September 30, 2014 and 2013, respectively. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future income, and tax planning strategies in making this assessment. We have recorded a full valuation allowance against the net deferred tax assets of the China, Dutch and French subsidiaries and of certain states since we believe that, after considering all of the available objective evidence, both positive and negative, historical and prospective, with greater weight given to historical evidence, it is not more likely than not that these assets will be realized.

The Company has federal net operating loss carryforwards of approximately $2.6 million that expire in 2034. The company also has foreign net operating loss carryforwards of approximately $29.3 million that generally expire between 2016 and 2023. The Company also has state net operating loss carryforwards of approximately $3.6 million that expire between 2015 and 2019.

Tax refunds of $6.5 million were received during fiscal 2014.

Undistributed earnings of the Company’s foreign subsidiaries amounted to approximately $1.4 million at September 30, 2014. The Company’s historical and continuing policy is that its undistributed foreign earnings are indefinitely reinvested and, accordingly, no related provision for U.S. federal and state income taxes has been provided on the $1.4 million of undistributed foreign earnings. The amount of taxes attributable to these undistributed earnings is immaterial.

The Company applies the provisions of FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes”, (now codified as FASB ASC 740, “Income Tax”). In this regard, an uncertain tax position represents the Company's expected treatment of a tax position taken in a filed tax return, or planned to be taken in a future tax return, that has not been reflected in measuring income tax expense for financial reporting purposes. Approximately $1.8 million of this total represents the amount that, if recognized, would favorably affect our effective income tax rate in future periods.

A reconciliation of the beginning and ending amount of our unrecognized tax benefits is summarized as follows:



	Year Ended September 30,
	2014		2013			2012
	(dollars in thousands)
Balances at beginning of the year	$	2,810	$	2,360		$	2,630
Additions (reductions) related to current year tax positions	—		—			(390		)
Additions related to tax positions taken in prior years	370		530			360
Reductions related to settlements with tax authorities	—		—			(240		)
Reductions due to lapse of statute of limitations	—		(80		)	—
Balance at the end of the year	$	3,180	$	2,810		$	2,360

We have classified all of our liabilities for uncertain tax positions as income taxes payable long-term.

We report accrued interest and penalties related to unrecognized tax benefits in income tax expense. We recognized a net expense for interest and penalties of $0.4 million, $0.5 million and $0.4 million for fiscal years 2014, 2013 and 2012, respectively. Income taxes payable long-term on the consolidated balance sheets includes a cumulative accrual for potential interest and penalties of $1.6 million and $1.2 million as of September 30, 2014 and 2013, respectively. During fiscal 2012, we recorded a benefit of $0.2 million, resulting from the reversal of liabilities in taxing jurisdictions where a tax examination was finalized.

The Company does not expect that the amount of our tax reserves for uncertain tax positions will materially change in the next 12 months other than the continued accrual of interest and penalties.

The Company and one or more of its subsidiaries file income tax returns in The Netherlands, Germany, France and other foreign jurisdictions, as well as the U.S. and various states in the U.S. We have not signed any agreements with the Internal Revenue Service, any state or foreign jurisdiction to extend the statute of limitations for any fiscal year. As such, the number of open years is the number of years dictated by statute in each of the respective taxing jurisdictions, but generally is from 3 to 5 years.

These open years contain certain matters that could be subject to differing interpretations of applicable tax laws and regulations as they relate to the amount, timing, or inclusion of revenues and expenses, or the sustainability of income tax positions of the Company and its subsidiaries. During fiscal year 2012, the IRS examination for the fiscal year ending September 30, 2009 was closed without adjustment.