Note 4 - Income Taxes

12 Months Ended

Sep. 30, 2012

Income Tax Disclosure [Text Block]

4.         Income Taxes

 The components of income before income tax and income tax expense (benefit) are comprised of the following:

	For the Years Ended September 30,
	2012			2011
	(Amounts in thousands)
Income before income tax:
U.S.	$	4,382		$	501
Foreign	487			214
	$	4,869		$	715
Income tax expense (benefit):
Current:
Federal	$	1,088		$	157
State	58			39
Foreign	40			(12		)
	1,186			184
Deferred:
Federal	(2,734		)	(16		)
State	(274		)	19
Foreign	82			159
	(2,926		)	162
	$	(1,740	)	$	346

 We realized a tax benefit for the year ended September 30, 2012, despite the fact that we had positive earnings before taxes for the year.  This was because we reduced the valuation allowance on our deferred tax assets, which had been accumulated over the past several years.  The recording and ultimate reversal of valuation allowances for our deferred tax asset requires significant judgment associated with past and projected performance.  In assessing the realizability of deferred tax assets, we consider our taxable future earnings and the expected timing of the reversal of temporary differences. In prior years, we recorded a valuation allowance which reduced the gross deferred tax asset to an amount that we believed was more likely than not to be realized because our inability to project future profitability beyond fiscal year 2012 in the U.S. and cumulative losses incurred in recent years in the United Kingdom represented sufficient negative evidence to record a valuation allowance against certain deferred tax assets.

As of September 30, 2012, management assessed the positive and negative evidence in the U.S operations, and estimated we will have sufficient future taxable income to utilize the existing deferred tax assets. Significant objective positive evidence included the cumulative profits that we realized over the most recent years.  This evidence enhances our ability to consider other subjective evidence such as our projections for future growth. Other factors we considered are the likelihood for continued royalty income in future years, and our expectation that the Service and Systems Integration segment will continue to be profitable in future years. On the basis of this evaluation, as of September 30, 2012, we have concluded that our US deferred tax asset is more likely than not to be realized. Therefore, we reversed the U.S. valuation allowance of $3.0 million, resulting in an overall tax benefit for the year ended September 30, 2012.  It should be noted however, that the amount of the deferred tax asset realized could be adjusted in future years, if estimates of taxable income during the carryforward periods are reduced, or if objective negative evidence in the form of cumulative losses is present.

We continue to  maintain a full valuation allowance against our United Kingdom deferred tax assets as we have experienced cumulative losses and do not have any indication that the operation will be profitable in the future to an extent that will allow us to utilize much of our net operating loss carryforwards. To the extent that actual experience deviates from our assumptions, our projections would be affected and hence our assessment of realizability of our deferred tax assets may change.

Reconciliation of “expected” income tax expense (benefit) to “actual” income tax expense (benefit) is as follows:

	For the Years Ended September 30,
	2012					2011
	(Dollar amounts in thousands)
Computed “expected” tax expense	$	1,656		34.0	%	$	243		34.0	%
Increases (reductions) in taxes resulting from:
State income taxes, net of federal tax benefit		(236	)	(4.9	)%		38		5.2	%
Foreign operations		(176	)	(3.6	)%		(85	)	(11.9	)%
Change in valuation allowance		(2,762	)	(56.8	)%		(46	)	(6.4	)%
Permanent differences		(388	)	(8.0	)%		8		1.1	%
Stock-based compensation		4		0.1	%		11		1.6	%
Foreign net operating loss		107		2.2	%		163		22.8	%
Uncertain tax liability adjustment		37		0.8	%		14		2.0	%
Other items		18		0.4	%		—		—
Income tax expense	$	(1,740	)	(35.8	)%	$	346		48.4	%

The Company recorded a consolidated income tax benefit of $1.7 million in fiscal year 2012 reflecting an effective tax benefit rate of (36)% compared to a tax expense of $0.3 million in fiscal year 2011 with an effective tax rate of 48%.

For the years ended September 30, 2012 and 2011, temporary differences, which give rise to deferred tax assets (liabilities), are as follows:

	September 30, 2012			September 30, 2011
	(Amounts in thousands)
Deferred tax assets:
Pension	$	1,911		$	2,142
Goodwill		723			821
Other reserves and accruals		625			483
Inventory reserves and other		713			566
State credits, net of federal benefit		79			86
Federal and state net operating loss carryforwards		30			54
Foreign net operating loss carryforwards		1,815			1,898
Foreign tax credits		7			7
Depreciation and amortization		61			111
Gross deferred tax assets		5,964			6,168
Less: valuation allowance		(2,307	)		(5,347	)
Realizable deferred tax asset		3,657			821
Gross deferred tax liabilities		—			—
Net deferred tax assets	$	3,657		$	821

The deferred tax valuation allowance decreased by $3.0 million, from $5.3 million at September 30, 2011, to $2.3 million at September 30, 2012. In assessing the realizability of deferred tax assets, the Company considers its taxable future earnings and the expected timing of the reversal of temporary differences. Accordingly, the Company has recorded a valuation allowance which reduces the gross deferred tax asset to an amount which management believes will more likely than not be realized. The valuation allowance was determined by assessing both positive and negative evidence whether it is more likely than not that deferred tax assets are realizable. Such assessment is done on a jurisdiction-by-jurisdiction basis. The Company's inability to project future profitability beyond fiscal year 2013 and the cumulative losses incurred in recent years in the U.K. represent sufficient negative evidence to record a valuation allowance against certain deferred tax assets.

As of September 30, 2012 and 2011, the Company had U.S. net operating loss carryforwards for state tax purposes of approximately $ 1.2 million and $1.5 million, respectively which are available to offset future taxable income through 2030.

As of September 30, 2012, the Company had U.K. net operating loss carryforwards of approximately $8.9 million that have an indefinite life with no expiration.

Undistributed earnings of the Company's foreign subsidiaries amounted to approximately $3.4 million and $3.0 million at September 30, 2012 and 2011, respectively. The Company's policy is that its undistributed foreign earnings are indefinitely reinvested and, accordingly, no U.S. federal and state deferred tax liabilities have been recorded.

In addition, the calculation of the Company's tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions. The Company records liabilities for estimated tax obligations in the U.S. and other tax jurisdictions. These estimated tax liabilities include the provision for taxes that may become payable in the future.

As of September 30, 2012, the total amount of uncertain tax liabilities was $0.6 million, all of which would affect our effective tax rate if recognized. We recognize interest and potential penalties accrued related to unrecognized tax benefits in our provision for income taxes.

A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:

	For the Year Ended September 30, 2012			For the Year Ended September 30, 2011
	(Amounts in thousands)
Balance, beginning of year	$	472		$	—
Increases in tax positions in the current year		104			458
Settlements		—			—
Lapse in statute of limitations		(2	)		—
Accrued penalties and interest		37			14
Balance, end of period	$	611		$	472

We file income tax returns in the U.S. federal jurisdictions and various state and foreign jurisdictions.  The Company has reviewed the tax positions taken on returns filed domestically and in its foreign jurisdictions for all open years, generally fiscal 2009 through 2012, and believes that tax adjustments in any audited year will not be material, except for the uncertain tax position described above.