Note 8 - Income taxes



Income (loss) from continuing operations	2013	2012
Domestic	($7,485)	($6,719)
Foreign	19,785	(2,213	)
Total	$12,300	($8,932)



Components of income tax (benefit) expense
Current
Federal	($245)		($964)
Foreign	3,024		229
State and other	(82	)	(34	)
Subtotal	2,697		(769	)
Deferred
Federal	(2,715	)	12,545
Foreign	(475	)	466
State and other	—		(417	)
Subtotal	(3,190	)	12,594
Total	$(493)		$11,825

The excess tax benefit related to stock options recorded through equity was $11 thousand in 2012 and did not affect net loss. The amounts were recorded to additional paid-in capital on the consolidated balance sheets and in financing activities 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 2013 was less than the statutory U.S. federal income tax rate, mainly due to the mix of the U.A.E. earnings (loss) versus total earnings (loss) because the U.A.E. is not subject to any local country income tax. Additionally, the ETR in 2013 is impacted by the $1.2 million release of the full valuation allowance related to the Company's deferred tax assets in Saudi Arabia. As a result of two quarters of positive operating income as well as management's expectations of this subsidiary's profitability for the fiscal year 2013, the Company believes the second quarter of 2013 was the appropriate time to release the valuation allowance. The ETR in 2012 was less than the statutory U.S. federal income tax rate, primarily due to the full valuation allowance of $13.9 million recorded on the domestic deferred tax assets.

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



	2013			2012
Tax benefit at federal statutory rate	$4,182			($3,037)
Domestic valuation allowance	—			12,975
Valuation allowance for state NOLs	—			972
Differences in foreign tax rate	(3,049		)	823
Foreign tax credit	—			(67		)
Research tax credit	—			(46		)
Valuation allowance for foreign NOLs	(1,209		)	613
Nontaxable income from the Canadian joint venture	(179		)	(471		)
State taxes, net of federal benefit	(192		)	(247		)
All other, net expense	(46		)	310
Total		($493	)		$11,825

The Company has a Federal operating loss carryforward of $9.1 million that will begin to expire in the year ending January 31, 2030.

The deferred tax asset, ("DTA") for state NOL carryforwards of $1.2 million relates to amounts that expire at various times from 2014 to 2031. The amount that expired in 2013 is approximately $2 thousand.

The Company has a DTA for foreign NOL carryforwards of $0.5 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 $0.5 million for its subsidiary in Saudi Arabia that can be carried forward indefinitely and does not have a 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, 2014, 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 2012, 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 recorded a full valuation allowance against the net domestic DTA discretely during the fourth quarter of 2012.

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, 2014, 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, 2014 were $22 million.



Components of deferred income tax assets	2013		2012
U.S. Federal NOL carryforward	$2,298		$3,680
Non-qualified deferred compensation	2,358		2,092
Research tax credit	1,965		1,964
Foreign NOL carryforward	1,004		612
Foreign tax credit	1,294		1,297
Stock compensation	1,162		1,417
Other accruals not yet deducted	581		1,086
State NOL carryforward	1,173		1,066
Accrued commissions and incentives	814		837
Accrued pension	182		428
Inventory valuation allowance	413		306
Other	217		94
Inventory uniform capitalization	102		132
Deferred tax assets, gross	13,563		15,011
Valuation allowance	(11,591	)	(12,960	)
Total deferred tax assets, net of valuation allowances	$1,972		$2,051

Components of the deferred income tax liability
Depreciation	$963		$1,040
Prepaid	231		340
Total deferred tax liabilities	$1,194		$1,380

Deferred tax asset, net	$778		$671

Balance sheet classification
Long-term assets	$1,667		$1,358
Current liabilities	889		687
Total deferred tax assets, net of valuation allowances	$778		$671

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



	2013		2012
Balance at beginning of the year	$1,373		$1,213
Increases in positions taken in a prior period	—		30
Increases in positions taken in a current period	11		200
Decreases due to lapse of statute of limitations	(26	)	(70	)
Balance at end of the year	$1,358		$1,373

Included in the total UTP liability at January 31, 2014 were estimated accrued interest of $18 thousand and penalties of $25 thousand and at January 31, 2013, accrued interest was $81 thousand and penalties were $66 thousand. 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, 2014, 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, 2014 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, 2014 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. The IRS began an audit of the fiscal year ended January 31, 2012 in the third quarter of 2013. Tax years back to January 31, 2011 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.