9. INCOME TAXES

For the years ended May 31, 2014, 2013 and 2012, we were taxed on income from continuing operations at an effective tax rate of 35%, 37% and 37%, respectively. Our income tax provision for May 31, 2014, 2013 and 2012 was $16.2 million, $19.2 million and $19.4 million, respectively, and include federal, state and foreign taxes. The components of our tax provision were as follows (in thousands):


	Current		Deferred			Total
Year ended May 31, 2014:
U.S. Federal	$	11,933	$	358		$	12,291
State & local		1,759		319			2,078
Foreign jurisdictions		3,573		(1,706	)		1,867

	$	17,265	$	(1,029	)	$	16,236

Year ended May 31, 2013:
U.S. Federal	$	7,947	$	4,873		$	12,820
State & local		1,847		236			2,083
Foreign jurisdictions		4,328		(20	)		4,308

	$	14,122	$	5,089		$	19,211

Year ended May 31, 2012:
U.S. Federal	$	10,918	$	379		$	11,297
State & local		1,880		62			1,942
Foreign jurisdictions		7,378		(1,195	)		6,183

	$	20,176	$	(754	)	$	19,422

The components of pre-tax income for the years ended May 31, 2014, 2013 and 2012 were as follows (in thousands):


	Twelve Months Ended May 31,
	2014		2013		2012
Domestic	$	38,214	$	37,445	$	31,984
Foreign		8,171		14,480		20,506

	$	46,385	$	51,925	$	52,490

Income tax expense attributable to income differed from the amounts computed by applying the U.S. Federal income tax rate of 35% to pre-tax income from continuing operations as a result of the following (in thousands):


	Twelve Months Ended May 31,
	2014			2013			2012
Pre-tax income	$	46,385		$	51,925		$	52,490

Computed income taxes at statutory rate	$	16,235		$	18,174		$	18,371
State income taxes, net of federal benefit		1,505			1,570			1,342
Foreign tax rate differential		(1,004	)		(1,261	)		(471	)
Production activity deduction		(174	)		(113	)		(161	)
Deferred taxes on investment in foreign subsidiaries		(1,133	)		712			—
Non-deductible expenses		510			473			470
Foreign tax credits		(1,942	)		(3	)		—
Other tax credits		(244	)		(337	)		(233	)
Dividend from foreign subsidiaries		2,062			—			—
Valuation allowance		414			65			—
Other		7			(69	)		104

Total provision for income tax	$	16,236		$	19,211		$	19,422

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below (in thousands):


	May 31,
	2014			2013
Deferred tax assets:
Accrued compensation and benefits	$	3,625		$	3,819
Receivables		1,180			1,686
Inventory		560			598
Stock options		3,299			3,671
Foreign currency translation and other equity adjustments		1,242			—
Net operating loss carry forwards		352			175
Other		2,675			1,158

Deferred tax assets		12,933			11,107
Less: Valuation allowance		(479	)		(65	)

Deferred tax assets, net		12,454			11,042

Deferred tax liabilities:
Property, plant and equipment		(11,248	)		(12,548	)
Goodwill and intangible costs		(6,619	)		(5,308	)
Foreign currency translation and other equity adjustments		—			(261	)
Unremitted earnings of foreign subsidiaries		(1,185	)		(1,973	)
Prepaids		(1,318	)		(1,263	)
Other		(588	)		(718	)

Deferred tax liabilities		(20,958	)		(22,071	)

Net deferred tax liability	$	(8,504	)	$	(11,029	)

As of May 31, 2014, we had a valuation allowance of $0.5 million to reduce our deferred tax assets to an amount more likely than not to be recovered. This valuation allowance relates to net operating loss carry forwards related to closure of foreign subsidiaries in the amount $0.2 million and deferred tax assets related to our investment in Venezuelan operations in the amount of $0.3 million. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider the reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.

As of May 31, 2014, we had net operating loss carry forwards totaling $0.9 million that were expected to be realized in fiscal year 2015. The total $0.9 million has an unlimited carry forward period and will therefore not expire.

At May 31, 2014, undistributed earnings of foreign operations totaling $15.7 million were considered to be permanently reinvested. We have recognized no deferred tax liability for the remittance of such earnings to the U.S. since it is our intention to utilize those earnings in the foreign operations. Generally, such earnings become subject to U.S. tax upon the remittance of dividends and under certain other circumstances. Determination of the unrecognized deferred U.S. income tax liability is not practicable due to uncertainties related to the timing and source of any potential distribution of such funds, along with other important factors such as the amount of associated foreign tax credits.

At May 31, 2014, we have established liabilities for uncertain tax positions of $0.7 million, inclusive of interest and penalties. To the extent these uncertainties are ultimately resolved favorably, the resulting reduction of recorded liabilities would have an effect on our effective tax rate. In accordance with ASC 740-10 our policy is to recognize interest and penalties related to unrecognized tax benefits through the tax provision.

We file income tax returns in the U.S. with federal and state jurisdictions as well as various foreign jurisdictions. With few exceptions, we are no longer subject to U.S. Federal, state and local or non-U.S. income tax examinations by tax authorities for fiscal years prior to fiscal year 2011. We are currently in the examination phase of IRS audits for the tax years ended May 31, 2011 and May 31, 2012 and expect these audits to be completed within the next twelve to eighteen months. The income tax laws and regulations are voluminous and are often ambiguous. As such, we are required to make certain subjective assumptions and judgments regarding our tax positions that may have a material effect on our results of operations, financial position or cash flows. We believe, however, that there is appropriate support for the income tax positions taken, and to be taken, on our returns, and that our accruals for tax liabilities are adequate for all open tax years based on an assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter.

Set forth below is a reconciliation of the changes in our unrecognized tax benefits associated with uncertain tax positions (in thousands):


	Year Ended May 31,
	2014			2013			2012
Balance at beginning of year	$	697		$	624		$	421
Additions based on tax positions related to the current year		—			—			326
Additions based on tax positions related to prior years		110			191			—
Reductions resulting from a lapse of the applicable statute of limitations		(92	)		(118	)		(123	)

Balance at end of year	$	715		$	697		$	624

We believe that in the next eighteen months it is reasonably possible $0.1 million of liabilities recorded for tax uncertainties will be effectively settled.

Recent Legislation

The American Taxpayer Relief Act of 2012 was signed into law on January 2, 2013 and included an extension for one year of the 50% bonus depreciation allowance. The provision specifically applies to qualifying property placed in service before January 1, 2014. The acceleration of deductions for the year ended May 31,

2014 on qualifying capital expenditures resulting from the bonus depreciation provision had no impact on our current period effective tax rate because the acceleration of deductions does not result in permanent differences between asset bases for financial reporting purposes and income tax purposes. However, the ability to accelerate depreciation deductions decreased our fiscal year 2014 cash taxes by approximately $1.5 million. Taking the accelerated tax depreciation will result in increased cash taxes in subsequent periods when the deductions for these capital expenditures would have otherwise been taken. The act also reinstated the research and development credit retroactively from January 1, 2012 through December 31, 2013. This change in legislation resulted in a permanent decrease in income tax expense for the year ended May 31, 2014 of $0.2 million.