Note 7 - Income taxes



(Loss) income before income taxes	2012		2011
Domestic	($5,273)		$4,517
Foreign	(2,422	)	(9,459	)
Total	($7,695)		($4,942)



Components of income tax expense (benefit)
Current
Federal	($1,255)		$183
Foreign	229		627
State and other	(33	)	253
Subtotal	(1,059	)	1,063
Deferred
Federal	11,816		(880	)
Foreign	413		(273	)
State and other	(380	)	107
Subtotal	11,849		(1,046	)
Total	$10,790		$17

The excess tax benefit (expense) related to stock options recorded through equity and did not affect net loss was $11 thousand benefit and $6 thousand expense in 2012 and 2011, respectively. The amounts were recorded to additional paid-in capital on the consolidated balance sheets and in financing activities in 2012 and operating activities in 2011 on the consolidated statement of cash flows.

The determination of the consolidated provision for income taxes, deferred tax assets and liabilities, and the related valuation allowances requires management to make judgments and estimates. As a company with subsidiaries in foreign jurisdictions, the Company is required to calculate and provide for estimated income tax expense for each of the tax jurisdictions. The process of calculating income taxes involves estimating current tax obligations and exposures in each jurisdiction as well as making judgments regarding the future recoverability of deferred tax assets. Changes in the estimated level of annual pre-tax income, in tax laws, and resulting from tax audits can affect the overall ETR, which impacts the level of income tax expense and net income. Judgments and estimates related to the Company's projections and assumptions are inherently uncertain; therefore, actual results could differ materially from projections.

The ETR in 2012 was less than the statutory U.S. federal income tax rate, mainly due to the full valuation allowance of $12.5 million recorded on the domestic deferred tax assets. The 2012 and 2011 ETRs have been impacted by the mix of the U.A.E. (loss) earnings versus total (loss) earnings because the U.A.E. is not subject to any local country income tax The ETR in 2011 was less than the statutory U.S. federal income tax rate, primarily due to foreign losses and repatriation of foreign earnings. Another contributing factor for both years to the unusual ETR is the valuation allowance set up on the NOL in Saudi Arabia. The Company does not record a tax benefit for its start-up entities. This facility began production in 2012.

The difference between the provision for income taxes and the amount computed by applying the Federal ETR of 34% was as follows:



	2012			2011
Tax benefit at federal statutory rate	($2,616)			($1,690)
Domestic valuation allowance	11,464			—
Valuation allowance for state NOLs	1,066			52
Differences in foreign tax rate	842			1,429
Foreign tax credit	(67		)	(1,300		)
Research tax credit	(91		)	(951		)
Repatriation	—			1,810
Valuation allowance for foreign NOLs	613			559
Nontaxable income from the Canadian joint venture	(471		)	(530		)
State taxes, net of federal benefit	(216		)	308
All other, net expense	266			330
Total		$10,790			$17

The Company has a Federal operating loss carryforward of $12.4 million that will begin to expire in the year ending January 31, 2030.

The deferred tax asset, ("DTA") for state NOL carryforwards of $1.1 million relates to amounts that expire at various times from 2013 to 2031. The amount that expired in 2012 is approximately $14 thousand.

The Company has a DTA for foreign NOL carryforwards of $1 million that can be carried forward indefinitely and does not have a valuation allowance recorded against it. The ultimate realization of this tax benefit is dependent upon the generation of sufficient operating income in the foreign tax jurisdictions. The Company has a DTA foreign NOL carryforwards of $1.2 million for its start-up subsidiary in Saudi Arabia which has a full valuation allowance recorded against it.

The Company periodically reviews the adequacy of its valuation allowance in all of the tax jurisdictions in which it operates, evaluates future sources of taxable income and tax planning strategies and may make further adjustments based on management's outlook for continued profits in each jurisdiction

For the year ending January 31, 2013, the Company has determined that there is not greater than 50% likelihood that all of the domestic DTAs will be realized based on the available evidence. The Company recorded a full valuation allowance against the remaining domestic net DTAs as of January 31, 2013 net of uncertain tax positions ("UTP").

In the prior year and the first three quarters of the current period, the Company relied heavily on Subpart F income as a future source of taxable income to support their conclusion that the domestic deferred tax assets were more-likely-than-not realizable. During the fourth quarter, legislation was passed which extended the provisions of IRC 954(c)(6). Because of this, the Company will not have Subpart F income related to royalty payments and can no longer rely on Subpart F income as a future source of taxable income during the periods that IRC 954(c)(6) is in effect. Accordingly, the Company has recorded a full valuation allowance against the net domestic DTA discretely during the fourth quarter.

The Company has not provided for Federal tax on unremitted earnings of its international subsidiaries. The Company anticipates that unremitted earnings will be reinvested overseas to fund current working capital requirements and expansion in foreign markets. Accordingly, a provision for income tax expense in excess of foreign jurisdiction income tax requirements relative to such unremitted earnings has not been provided in the accompanying financial statements. A deferred tax asset of $1.3 million was established in 2011 for U.S. foreign tax credits attributed to repatriated foreign earnings. The excess foreign tax credits are subject to a ten-year carryforward and will expire in January 31, 2022.

As of January 31, 2013, the Company had undistributed earnings of foreign subsidiaries for which deferred taxes have not been provided. The Company intends and has the opportunities to reinvest these earnings for the foreseeable future outside the U.S. If these amounts were distributed to the U.S., in the form of dividends or otherwise, the Company would be subject to additional U.S. income taxes. Determination of the amount of unrecognized deferred income tax liabilities on these earnings is not practicable because such liability, if any, is dependent on circumstances existing if and when remittance occurs. The most significant foreign entity, which has undistributed earnings is Perma-Pipe Middle East, FZC in the U.A.E., where cumulative undistributed earnings as of January 31, 2013 were $17 million.



Components of deferred income tax assets	2012		2011
U.S. Federal NOL carryforward	$3,680		$3,728
Non-qualified deferred compensation	2,092		1,968
Research tax credit	1,964		1,858
Foreign NOL carryforward	2,241		2,726
Foreign tax credit	1,297		1,300
Stock compensation	1,417		1,243
Other accruals not yet deducted	1,077		1,233
State NOL carryforward	1,066		921
Accrued commissions and incentives	837		691
Accrued pension	428		578
Inventory valuation allowance	306		300
Other	94		225
Inventory uniform capitalization	132		128
Deferred tax assets, gross	16,631		16,899
Valuation allowance	(14,180	)	(1,934	)
Total deferred tax assets, net of valuation allowances	$2,451		$14,965

Components of the deferred income tax liability
Depreciation	$1,041		$1,733
Prepaid	340		319
Total deferred tax liabilities	$1,381		$2,052

Deferred tax asset, net	$1,070		$12,913

Balance sheet classification
Current assets	$0		$1,946
Long-term assets	1,766		10,967
Current liabilities	$696		$0
Total deferred tax assets, net of valuation allowances	$1,070		$12,913

The following table summarizes UTP activity, excluding the related accrual for interest and penalties:



	2012		2011
Balance at beginning of the year	$1,213		$1,202
Increases (decreases) in positions taken in a prior period	30		(52	)
Increases in positions taken in a current period	200		89
Decreases due to lapse of statute of limitations	(70	)	(26	)
Balance at end of the year	$1,373		$1,213

Included in the total UTP liability at January 31, 2013 were estimated accrued interest of $81 thousand and penalties of $66 thousand and at January 31, 2012, accrued interest and penalties were $82 thousand each. These non-current income tax liabilities are recorded in other long-term liabilities in the consolidated balance sheet. The Company's policy is to include interest and penalties in income tax expense. At January 31, 2013, the Company did not anticipate any significant adjustments to its unrecognized tax benefits caused by the settlement of the ongoing tax examinations detailed above, or other factors, within the next twelve months. Included in the balance at January 31, 2013 were amounts offset by deferred taxes (i.e., temporary differences) or amounts that could be offset by refunds in other taxing jurisdictions (i.e., corollary adjustments). Thus, $1.4 million of the amount accrued at January 31, 2013 would impact the ETR, if reversed.

The Company is subject to income taxes in the U.S. federal jurisdiction, and various states and foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. Tax years back to January 31, 2010 are open for federal and state tax purposes. In addition, federal and state tax years January 31, 2002 through January 31, 2009 are subject to adjustment on audit, up to the amount of research tax credit generated in those years.

The Company's management periodically estimates the probable tax obligations of the Company using historical experience in tax jurisdictions and informed judgments. There are inherent uncertainties related to the interpretation of tax regulations in the jurisdictions in which the Company transacts business. The judgments and estimates made at a point in time may change based on the outcome of tax audits, as well as changes to or further interpretations of regulations. If such changes take place, there is a risk that the tax rate may increase or decrease in any period. Tax accruals for tax liabilities related to potential changes in judgments and estimates for federal, foreign and state tax issues are included in current liabilities on the consolidated balance sheet.