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Income Taxes | 12 Months Ended
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Sep. 30, 2022
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes The components of the income tax provision were as follows (in thousands):
| Year Ended September 30,
| 2022 |  | 2021 |  | 2020
Current: |  |  |  |  |
Federal | $ | 557 |  |  | $ | 911 |  |  | $ | 945 |
State | 403 |  |  | 472 |  |  | 1,186 |
Foreign | 7 |  |  | 73 |  |  | 66 |
| 967 |  |  | 1,456 |  |  | 2,197 |
Deferred: |  |  |  |  |
Federal | (154) |  |  | (1,062) |  |  | 1,045 |
State | (41) |  |  | (30) |  |  | (91) |
Foreign | (4,666) |  |  | 97 |  |  | 519 |
| (4,861) |  |  | (995) |  |  | 1,473 |
Total income tax provision (benefit) | $ | (3,894) |  |  | $ | 461 |  |  | $ | 3,670 |
Income before income taxes was as follows (in thousands):
| Year Ended September 30,
| 2022 |  | 2021 |  | 2020
U.S. | $ | 3,175 |  |  | $ | 3,076 |  |  | $ | 21,243 |
Foreign | 6,668 |  |  | (1,984) |  |  | (913) |
Income before income taxes | $ | 9,843 |  |  | $ | 1,092 |  |  | $ | 20,330 |
A reconciliation of the statutory U.S. income tax rate and the effective income tax rate, as computed on earnings before income tax provision (benefit) in each of the three years presented in the Consolidated Statements of Operations, was as follows:
| Year Ended September 30,
| 2022 |  | 2021 |  | 2020
Statutory rate | 21 | % |  | 21 | % |  | 21 | %
State income taxes, net of federal benefit | 3 |  |  | 25 |  |  | 5 |
Research and development credit | (14) |  |  | (101) |  |  | (13) |
Foreign rate differential | 1 |  |  | 10 |  |  | — |
Foreign taxes | — |  |  | 10 |  |  | — |
Valuation allowance | (62) |  |  | 62 |  |  | 4 |
Deferred tax rate differential | (1) |  |  | (19) |  |  | — |
Non-deductible expenses | 9 |  |  | 30 |  |  | 1 |
Impact of U.S. global intangible taxes and benefits | 3 |  |  | — |  |  | — |
Other(1) | — |  |  | 4 |  |  | — |
Effective rate | (40) | % |  | 42 | % |  | 18 | %
(1) Certain prior year amounts have not been reclassified for consistency with the current year presentation.
Our income tax benefit reflects an effective tax rate on pre-tax results of negative 40% in Fiscal 2022 compared to 42% and 18% in Fiscal 2021 and 2020, respectively. The income tax benefit for Fiscal 2022 was largely a result of the reversal of a valuation allowance on the Canadian deferred tax assets that were previously fully reserved, in addition to the current year estimated Research and Development Tax Credit (R&D Tax Credit). These items were partially offset by the tax expense related to certain nondeductible expenses, the gain on the disposition of a small, non-core division of our Canadian operations and an inclusion related to U.S. global intangible income. The tax provision for Fiscal 2021 and 2020 was favorably impacted by the estimated R&D Tax Credit as well as the utilization of net operating loss carryforwards in Canada that were fully reserved with a valuation allowance. In Fiscal 2021, the tax provision was negatively impacted by the losses recognized in other foreign jurisdictions, primarily in the United Kingdom (U.K.), that were reserved with a valuation allowance as well as the establishment of a valuation allowance against the deferred tax assets in Mexico. While in Fiscal 2020, discrete items recorded in the third quarter in the amount of $1.7 million associated with the release of reserves for unrecognized tax benefits as a result of the expiration of statutes of limitations and the IRS audit settlement favorably impacted the effective tax rate. The effective tax rate was negatively impacted by the discrete item recorded in the second quarter of Fiscal 2020 for the valuation allowance against our U.K. deferred tax assets in the amount of $0.5 million as well as by the losses recognized in various foreign jurisdictions that were reserved with a valuation allowance. We record and maintain valuation allowances against the deferred tax assets of various foreign jurisdictions until sufficient evidence is available to demonstrate that it is more likely than not that the net deferred tax assets will be recognized. As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. During the period ended June 30, 2022, management determined that there was sufficient positive evidence to conclude that Canadian net deferred tax assets of $5.9 million were realizable. This determination was based on current and anticipated market conditions, continued market diversification, operating results over the past three years and anticipated future taxable income from our Canadian operations. The valuation allowance was released accordingly, and a $5.9 million tax benefit and corresponding increase in the deferred tax assets were recorded. During our assessment of deferred income taxes in Fiscal 2020 and 2021, we recorded a valuation allowance of $0.5 million against our U.K. net deferred tax assets in the second quarter of Fiscal 2020 and a valuation allowance of $0.1 million against our Mexican net deferred tax assets in the fourth quarter of Fiscal 2021. In assessing the realizability of net deferred tax assets, we determined it was more likely than not that the net deferred tax assets may not be realized based upon recent U.K. and Mexican tax losses and anticipated results in the near term. Estimates may change as new events occur, estimates of future taxable income are reduced or increased, additional information becomes available, or operating environments change, which may result in a full or partial reversal of the valuation allowance. We have not recorded deferred income taxes on $13.5 million of undistributed earnings of our foreign subsidiaries because of management’s intent to indefinitely reinvest such earnings. Upon distribution of these earnings in the form of dividends or otherwise, we may be subject to U.S. income taxes and foreign withholding taxes. It is not practical, however, to estimate the amount of taxes that may be payable on the eventual remittance of these earnings. We are subject to income tax in the U.S., multiple state jurisdictions and certain international jurisdictions, primarily the U.K. and Canada. We do not consider any state in which we do business to be a major tax jurisdiction. We remain open to examination in the other jurisdictions as follows: Canada 2015 – 2021, United Kingdom 2021 and the United States 2019 – 2021. As of September 30, 2022, we did not have any state audits underway that would have a material impact on our financial position or results of operations. The net deferred income tax asset was comprised of the following (in thousands):
| September 30,
| 2022 |  | 2021
Gross assets | $ | 17,941 |  |  | $ | 20,427 |
Gross liabilities and valuation allowance | (8,780) |  |  | (15,788) |
Net deferred income tax asset | $ | 9,161 |  |  | $ | 4,639 |
The tax effect of temporary differences between U.S. GAAP accounting and federal income tax accounting creating deferred income tax assets and liabilities was as follows (in thousands):
| September 30,
| 2022 |  | 2021
Deferred Tax Assets: |  |  |
Net operating loss | $ | 10,186 |  |  | $ | 12,682 |
Credit carryforwards | 1,332 |  |  | 1,598 |
Deferred compensation | 1,897 |  |  | 2,095 |
Uniform capitalization and inventory | 1,506 |  |  | 1,222 |
Stock-based compensation | 1,083 |  |  | 921 |
Reserve for accrued employee benefits | 872 |  |  | 718 |
Warranty accrual | 559 |  |  | 579 |
Accrued legal | 161 |  |  | 130 |
Postretirement benefits liability | — |  |  | 156 |
Other | 345 |  |  | 326 |
Deferred tax assets | $ | 17,941 |  |  | $ | 20,427 |
Deferred Tax Liabilities: |  |  |
Depreciation and amortization | $ | (3,764) |  |  | $ | (4,404) |
Retention and other | (1,229) |  |  | (886) |
Deferred tax liabilities | $ | (4,993) |  |  | $ | (5,290) |
Less: valuation allowance | (3,787) |  |  | (10,498) |
Net deferred tax asset | $ | 9,161 |  |  | $ | 4,639 |
As of September 30, 2022, our tax credit carryforwards are fully reserved with a valuation allowance. We had deferred tax assets related to international net operating loss carryforwards of $7.7 million that were not reserved with a valuation allowance available to offset future tax liabilities in the respective jurisdictions. The majority of these net operating loss carryforwards are related to our Canadian operations and expire beginning in 2033. The remaining unreserved carryforwards related to other jurisdictions have an indefinite carryforward period. We have established a valuation allowance in the amount of $3.8 million primarily related to the U.K. net deferred tax assets. The net decrease in the total valuation allowance during the year was $6.7 million which was largely a result of the reversal of the Canadian valuation allowance. In assessing the realizability of net deferred tax assets, we consider whether it is more likely than not that some portion or all of the net deferred tax assets may not be realized. The ultimate realization of net deferred tax assets is dependent on the generation of future taxable income during the periods in which those temporary differences become deductible. A reconciliation of the beginning and ending amount of the unrecognized tax benefits follows (in thousands):
| Year Ended September 30,
| 2022 |  | 2021 |  | 2020
Balance at beginning of period | $ | 1,409 |  |  | $ | 1,252 |  |  | $ | 2,703 |
Increases related to tax positions taken during the current period | 240 |  |  | 251 |  |  | 220 |
Increases related to tax positions taken during a prior period | 92 |  |  | 75 |  |  | 97 |
Decreases related to expiration of statute of limitations | (327) |  |  | — |  |  | (545) |
Decreases related to settlement with taxing authorities | (37) |  |  | (169) |  |  | (1,223) |
Balance at end of period | $ | 1,377 |  |  | $ | 1,409 |  |  | $ | 1,252 |
Included in the balance of unrecognized tax benefits at the end of Fiscal 2022, 2021, and 2020 are $1.1 million, $1.1 million, and $0.8 million, respectively, of tax benefits that, if recognized, would affect the effective tax rate. Our policy is to recognize interest and penalties related to income tax matters as tax expense. The amount of interest and penalty expense recorded for the year ended September 30, 2022 was not material. Management believes that, within the next twelve months, it is reasonably possible that the unrecognized tax benefits will decrease by approximately $0.3 million due to the expiration of certain federal statutes of limitations. We are unable to make reasonably reliable estimates regarding the timing of future cash outflows, if any, associated with the remaining unrecognized tax benefits for the open periods of fiscal years ended September 30, 2019 – 2022. Management believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in our tax audits are resolved in a manner not consistent with management’s expectations, we could be required to adjust our provision for income tax in the period such resolution occurs.

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