Income Taxes

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



	Year Ended September 30,
	2012			2011			2010
	(dollars in thousands)
Current:
Domestic Federal	$	2,440		800			$	200
Foreign	(9,380		)	15,910			7,200
Domestic state	(90		)	110			110
Total current	(7,030		)	16,820			7,510

Deferred:
Domestic Federal	—			(100		)	(1,540		)
Foreign	1,700			(520		)	180
Domestic state	10			(10		)	—
Total deferred	1,710			(630		)	(1,360		)
Total provision (benefit)	$	(5,320	)	$	16,190		$	6,150

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



	Year Ended September 30,
	2012			2011			2010
	(dollars in thousands)
Tax provision (benefit) at the statutory federal rate	$	(11,190	)	$	13,410		$	5,340
Effect of permanent book-tax differences	2,010			510			240
State tax provision	(80		)	100			20
Valuation allowance for net deferred tax assets	1,740			470			90
Uncertain tax items	(240		)	1,620			530
Expiration of foreign net operating loss	2,320			170			—
Other items	120			(90		)	(70		)
	$	(5,320	)	$	16,190		$	6,150

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,
	2012			2011			2010
	(dollars in thousands)
Deferred tax assets - current:
Capitalized inventory costs	$	90		$	150		470
Inventory write-downs	600			590			820
Accrued Warranty	20			(580		)	370
Deferred profits	2,510			6,820			(180		)
Accruals and reserves not currently deductible	240			2,580			650
Deferred tax assets - current net of valuation allowance	$	3,460		$	9,560		$	2,130

Deferred tax assets (liabilities)- non-current:
Stock option expense	470			270			430
Book vs. tax basis of acquired assets	(1,280		)	(760		)	(670		)
Foreign and state net operating losses	3,640			850			380
Book vs. tax depreciation and amortization	100			300			350
Foreign tax credits	—			—			2,540
Other deferred tax assets	140			90			20
Total deferred tax assets - net	3,070			750			3,050
Valuation allowance	(2,600		)	(860		)	(390		)
Deferred tax assets (liabilities)- non-current, net of valuation allowance	$	470		$	(110	)	$	2,660

Changes in the deferred tax valuation allowance are as follows:



	Year Ended September 30,
	2012		2011		2010
	(dollars in thousands)
Balance at the beginning of the year	$	860	$	390	$	300
Additions (subtractions) to valuation allowance	1,740		470		90
Balance at the end of the year	$	2,600	$	860	$	390

Accounting for income taxes requires that a valuation allowance is recognized if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. Each quarter the valuation allowance is re-evaluated.

At September 30, 2012, the Company has net operating loss carryforwards in some states, China, Hong Kong and France which expire in varying amounts between 2013 and 2021. We have established a valuation allowance on all deferred tax assets related to these foreign and state net operating loss carryforwards, except those in France, as based on the weight of available evidence, it is more likely than not that they will not be realized.

Tax payments of $5.0 million were made and tax refunds of $1.1 million were received during fiscal 2012.

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,
	2012			2011			2010
	(dollars in thousands)
Balances at beginning of the year	$	2,630		$	1,010		$	480
Additions (reductions) related to current year tax positions	(390		)	1,210			490
Additions related to tax positions taken in prior years	360			450			70
Reductions related to settlements with tax authorities	(240		)	—			—
Reductions due to lapse of statute of limitations	—			(40		)	(30		)
Balance at the end of the year	$	2,360		$	2,630		$	1,010

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, $0.2 million and $0.1 million for fiscal years 2012, 2011 and 2010, respectively. Income taxes payable long-term on the consolidated balance sheets includes a cumulative accrual for potential interest and penalties of $0.7 million and $0.4 million as of September 30, 2012 and 2011 respectively. During the current fiscal year, 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.