Income Taxes

12 Months Ended

Sep. 30, 2011

Income Taxes [Abstract]

Income Taxes

I.     Income Taxes

The components of the income tax provision were as follows (in thousands):

	Year Ended September 30,
	2011			2010			2009
Current:
Federal	$	5,470		$	18,126		$	18,028
State		939			1,750			2,910
Foreign		563			1,071			1,146
		6,972			20,947			22,084
Deferred:
Federal		(122	)		(1,189	)		(930	)
State		(76	)		23			(113	)
Foreign		(62	)		113			(307	)
		(260	)		(1,053	)		(1,350	)
Total income tax provision	$	6,712		$	19,894		$	20,734

Income before interest, income taxes and minority interest was as follows (in thousands):

	Year Ended September 30,
	2011			2010			2009
U.S.	$	19,850		$	53,467		$	56,115
Other than U.S.		(15,853	)		(8,406	)		4,544
Income from continuing operations before provision for income taxes	$	3,997		$	45,061		$	60,659

A reconciliation of the statutory U.S. income tax rate and the effective income tax rate, as computed on earnings before income tax provision in each of the three years presented in the Consolidated Statements of Operations, was as follows:

	Year Ended September 30,
	2011			2010			2009
Statutory rate		35	%		35	%		35	%
State income taxes, net of federal benefit		14			3			3
International withholding tax		(9	)		—			(1	)
Other permanent tax items		5			—			—
Foreign rate differential		33			1			(1	)
Domestic production activities deduction		(16	)		(2	)		(2	)
Foreign valuation allowance and other		106			7			—
Effective rate		168	%		44	%		34	%

Our provision for income taxes reflects an effective tax rate on earnings before income taxes of 168% in fiscal year 2011 compared to 44% and 34% in fiscal years 2010 and 2009, respectively. The increase in the effective tax rates for fiscal years 2011 and 2010 resulted from a valuation allowance against deferred tax assets in Canada.

We have not recorded deferred income taxes on $16.0 million of undistributed earnings of our foreign subsidiaries because of management’s intent to indefinitely reinvest such earnings. Upon distribution of these earnings in the form of dividends or otherwise, we may be subject to U.S. income taxes and foreign withholding taxes. It is not practical, however, to estimate the amount of taxes that may be payable on the eventual remittance of these earnings.

We are subject to income tax in the U.S., multiple state jurisdictions and a few international jurisdictions, primarily the U.K. and in Canada since December 15, 2009. For U.S. Federal income tax purposes, all years prior to 2008 are closed. We do not consider any state in which we do business to be a major tax jurisdiction. We remain open to examination in the U.K. for tax years 2008 to the present.

The net deferred income tax asset (liability) was comprised of the following (in thousands):

	September 30,
	2011			2010
Current deferred income taxes:
Gross assets	$	6,801		$	7,252
Gross liabilities		(3,221	)		(4,165	)
Net current deferred income tax asset		3,580			3,087
Noncurrent deferred income taxes:
Gross assets		2,133			2,649
Gross liabilities		(114	)		(562	)
Net noncurrent deferred income tax asset		2,019			2,087
Net deferred income tax asset	$	5,599		$	5,174

At September 30, 2011 and 2010, the noncurrent deferred income tax asset was included in other assets on the Consolidated Balance Sheets.

The tax effect of temporary differences between U.S. GAAP accounting and federal income tax accounting creating deferred income tax assets and liabilities were as follows (in thousands):

	September 30,
	2011			2010
Deferred Tax Assets:
Allowance for doubtful accounts	$	89		$	110
Workers’ compensation		39			200
Stock-based compensation		354			390
Reserve for accrued employee benefits		1,579			1,638
Warranty accrual		935			1,672
Depreciation and amortization		956			1,291
Deferred compensation		1,343			999
Postretirement benefits liability		460			350
Accrued legal		182			84
Other		41			—
Uniform capitalization and inventory		4,667			3,813
Goodwill impairment		1,360			2,122
Net operating loss		3,144			903
Gross deferred tax asset		15,149			13,572
Less: valuation allowance		6,215			3,671
Deferred tax asset		8,934			9,901
Deferred Tax Liabilities:
Uncompleted contracts		(3,221	)		(4,164	)
Software development costs		—			(461	)
Other		(5	)		—
Capital lease		(109	)		(102	)
Deferred tax liability		(3,335	)		(4,727	)
Net deferred tax asset	$	5,599		$	5,174

At September 30, 2011, we had $11.7 million of gross foreign operating loss carryforward, which is subject to a 20-year carryforward. During the fiscal year ended September 30, 2011, we recorded a net valuation allowance of $6.2 million against our Canadian deferred tax assets, which we expect cannot be realized through future reversals of existing taxable temporary differences and our estimate of future taxable income. We believe that our deferred tax assets in other tax jurisdictions are more likely than not realizable through future reversals of existing taxable temporary differences and our estimate of future taxable income.

In the first quarter of fiscal year 2008, we adopted accounting guidance on the accounting for uncertainty in income taxes. Upon adoption of the guidance, we recorded a $0.3 million increase in our tax reserves, an offsetting decrease of $0.2 million to retained earnings for uncertain tax positions and an increase in deferred income tax assets of $0.1 million. As of the adoption date, we had total tax reserves of $1.2 million. This reserve includes an estimate of potential interest and penalties on estimated liabilities for uncertain tax positions, which were recorded as components of income tax expense, in the amount of $220,000 as of September 30, 2011. A reconciliation of the beginning and ending amount of the unrecognized tax liabilities follows (in thousands):

Balance as of September 30, 2010	$	841
Increases related to tax positions taken during a prior period		155
Decreases related to expectations of statute of limitations		(233	)
Balance as of September 30, 2011	$	763

Our continuing policy is to recognize interest and penalties related to income tax matters as tax expense. The amount of interest and penalty expense recorded for the year ended September 30, 2011, was not material.

There was no material change in the net amount of unrecognized tax benefits in the year ended September 30, 2011. Management believes that it is reasonably possible that within the next 12 months, the total unrecognized tax benefits will decrease by approximately 33% due to the expiration of certain statutes of limitations in various state and local jurisdictions.

Management believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in our tax audits are resolved in a manner not consistent with management’s expectations, we could be required to adjust our provision for income tax in the period such resolution occurs. Although timing of the resolution and/or closure of audits is highly uncertain, we do not believe it is reasonably possible that our unrecognized tax benefits would materially change in the next 12 months.