Note 8: Income Taxes

Income (loss) from continuing operations before income taxes was as follows:


(in thousands)	Fiscal 2013		Fiscal 2012			Fiscal 2011
United States	$	12,282	$	13,778		$	12,900
Foreign		327		(227	)		(532	)
	$	12,609	$	13,551		$	12,368

The components of the provision (benefit) for income taxes and reconciliation between the statutory rate for federal income taxes and the effective tax rate are summarized and presented below.


(in thousands)	Fiscal 2013			Fiscal 2012			Fiscal 2011
Tax Provision (Benefit)
Current:
Federal	$	(85	)	$	(817	)	$	(32	)
State		(126	)		853			341
Foreign		64			(128	)		15
		(147	)		(92	)		324
Deferred:
Federal		4,091			(9,530	)		—
State		(317	)		(1,565	)		—
Foreign		(12	)		(3,729	)		—
		3,762			(14,824	)		—
Tax Provision (Benefit)	$	3,615		$	(14,916	)	$	324


(in thousands)	Fiscal 2013			Fiscal 2012			Fiscal 2011
Tax Rate Reconciliation
Tax Provision (Benefit) at Federal Statutory Rate	$	4,413		$	4,743		$	4,329
State and Local Taxes, Net of Federal Tax Benefit		172			525			521
Effect of Changes in Tax Rates		(41	)		(76	)		(88	)
Change in Unrecognized Tax Benefits		(562	)		(1,029	)		(96	)
Valuation Allowance		—			(18,807	)		(4,398	)
Research and Development Credit		(106	)		(22	)		(79	)
Manufacturing Deduction		(80	)		(440	)		—
Other, Net		(181	)		190			135
Tax Provision (Benefit) at Effective Income Tax Rate	$	3,615		$	(14,916	)	$	324

Temporary differences that give rise to deferred tax assets and (liabilities) were as follows:


(in thousands)	Fiscal 2013			Fiscal 2012
Reserves Not Deductible Until Paid	$	1,145		$	1,270
Employee Benefit Liabilities		5,859			6,257
Net Operating Loss and Tax Credit Carryforwards		5,011			4,855
Property and Equipment		1,539			5,088
Other		351			434
Total Gross Deferred Tax Asset	$	13,905		$	17,904
Valuation Allowance		(567	)		(567	)
Total Net Deferred Tax Assets	$	13,338		$	17,337

The Company records deferred tax assets and liabilities using enacted tax rates on the differences between the book and tax basis of recorded assets and liabilities. Deferred tax assets are reduced by valuation allowances if, based on the consideration of all available evidence, it is more likely than not that some portion of the deferred tax assets will not be realized. During fiscal 2012, MSC reduced its valuation allowance by $4.0 million for reductions in the deferred tax assets during the year. After considering all available positive and negative evidence, the Company reversed $14.8 million of the remaining valuation allowance on its U.S. and German deferred tax assets as of February 29, 2012, as the Company determined that it was more likely than not that these benefits would be realized. The Company maintains a valuation allowance of $0.6 million on its deferred tax asset for certain state net operating losses as of February 28, 2013, because it is not more likely than not that these benefits will be realized.

As of February 28, 2013, deferred tax assets for federal, state and foreign net operating losses and tax credit carry forwards of $3.8 million were available with an unlimited expiration date, and the remaining $1.2 million (net of federal taxes) expires in varying amounts in fiscal years 2018 through 2032.

The company considers its China location earnings to be permanently reinvested, and therefore has not recorded a provision for U.S. income tax or foreign withholding taxes on the cumulative undistributed earnings of its China subsidiary. Such undistributed earnings from MSC’s China subsidiary have been included in consolidated retained earnings in the amount of $0.6 million and $0.6 million as of February 28, 2013, and February 29, 2012, respectively. If MSC were to change its intentions and such earnings were remitted to the U.S., these earnings would be subject to U.S. income taxes. However, as of February 28, 2013, and February 29, 2012, foreign tax credits would be available to offset these taxes such that the U.S. tax impact would be insignificant. MSC’s other foreign entities have losses and no positive earnings yet. However, MSC considers all of its foreign entity earnings to be permanently reinvested.

There are inherent uncertainties related to the interpretation of tax laws in the jurisdictions in which the Company transacts business. In evaluating its various tax filing positions, the Company records tax benefits only if management determines that they are more likely than not to be sustained. Adjustments are made to the Company’s liability for unrecognized tax benefits in the period in which an issue is settled with the respective tax authorities, the statute of limitations expires or when new information becomes available. Adjustments to the amounts accrued may increase or decrease tax expense in any period. A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows (in millions):


	Fiscal 2013			Fiscal 2012			Fiscal 2011
Gross unrecognized tax benefits at beginning of year	$	1.1		$	2.2		$	2.5
Decreases in tax positions for prior years		(0.2	)		(0.1	)		(0.2	)
Lapse in statute of limitations		(0.4	)		(1.0	)		(0.1	)
Gross unrecognized tax benefits at end of year	$	0.5		$	1.1		$	2.2

Amounts accrued for tax liabilities due to the potential change in judgments and estimates are $0.5 million at February 28, 2013. The total amounts of unrecognized tax benefits that, if recognized, would affect the effective tax rate were $0.2 million at February 28, 2013, $0.9 million at February 29, 2012, and $1.4 million at February 28, 2011.

The Company anticipates that it is reasonably possible that the total amount of unrecognized tax benefits of $0.5 million will decrease by up to $0.2 million during the next 12 months.

We file income tax returns in the U.S. on a federal basis and in a number of U.S., state and foreign jurisdictions. Our major tax jurisdictions are the U.S., Illinois, Michigan and Germany. For the U.S., Illinois, Michigan and Germany, the earliest fiscal years open for examination are 2012, 2009, 2008 and 2008, respectively. In January 2013, a U.S. income tax examination covering our fiscal years 2010 and 2011 was completed. The resolution of the U.S. tax audit did not materially affect the results of operations, financial position or cash flows.

The Company classifies interest expense and any penalties related to income tax uncertainties as a component of income tax expense. The Company recorded negligible interest and penalties in the fiscal 2013, 2012 and 2011 Consolidated Statement of Operations, respectively. The total accrued interest expense related to tax uncertainties recognized in the Consolidated Balance Sheets was $0.2 million at February 28, 2013, and $0.3 million at February 29, 2012.