9. INCOME TAXES

For the seven months ended December 31, 2015 and the years ended May 31, 2015, 2014 and 2013, we were taxed on income from continuing operations at an effective tax rate of 34%, 36%, 35% and 37%, respectively. Our income tax provision for seven months ended December 31, 2015 and years ended May 31, 2015, 2014 and 2013 was $4.6 million, $22.8 million, $16.2 million and $19.2 million, respectively, and includes federal, state and foreign taxes. The components of our tax provision were as follows (in thousands):


	Current			Deferred			Total
Seven months ended December 31, 2015:
U.S. Federal	$	(4	)	$	1,667		$	1,663
State & local		90			187			277
Foreign jurisdictions		2,128			505			2,633

	$	2,214		$	2,359		$	4,573

Year ended May 31, 2015:
U.S. Federal	$	17,183		$	606		$	17,789
State & local		2,634			(141	)		2,493
Foreign jurisdictions		3,598			(1,087	)		2,511

	$	23,415		$	(622	)	$	22,793

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

The components of pre-tax income for the seven months ended December 31, 2015 and the years ended May 31, 2015, 2014 and 2013 were as follows (in thousands):


	Seven Months Ended December 31,		Twelve Months Ended May 31,
	2015		2015		2014		2013
Domestic	$	6,627	$	51,784	$	38,214	$	37,445
Foreign		6,824		11,506		8,171		14,480

	$	13,451	$	63,290	$	46,385	$	51,925

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):


	Seven Months Ended December 31,			Twelve Months Ended May 31,
	2015			2015			2014			2013
Pre-tax income	$	13,451		$	63,290		$	46,385		$	51,925

Computed income taxes at statutory rate		4,710		$	22,153		$	16,235		$	18,174
State income taxes, net of federal benefit		258			1,670			1,505			1,570
Foreign tax rate differential		(648	)		(1,318	)		(1,004	)		(1,261	)
Production activity deduction		(10	)		(136	)		(174	)		(113	)
Deferred taxes on investment in foreign subsidiaries		(335	)		819			(1,133	)		712
Non-deductible expenses		335			513			510			473
Foreign tax credits		(19	)		(11	)		(1,942	)		(3	)
Other tax credits		(446	)		(223	)		(244	)		(337	)
Dividend from foreign subsidiaries		—			—			2,062			—
Valuation allowance		771			(394	)		414			65
Other		(43	)		(280	)		7			(69	)

Total provision for income tax	$	4,573		$	22,793		$	16,236		$	19,211

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):


	December 31,			May 31,
	2015			2015			2014
Deferred tax assets:
Accrued compensation and benefits	$	4,023		$	5,752		$	3,625
Receivables		739			513			1,180
Inventory		552			553			560
Stock options		2,241			3,110			3,299
Foreign currency translation and other equity adjustments		5,189			2,897			1,242
Net operating loss carry forwards		1,420			1,198			352
Other		2,647			3,474			2,675

Deferred tax assets		16,811			17,497			12,933
Less: Valuation allowance		(857	)		(85	)		(479	)

Deferred tax assets, net		15,954			17,412			12,454

Deferred tax liabilities:
Property, plant and equipment		(11,840	)		(11,679	)		(11,248	)
Goodwill and intangible costs		(10,496	)		(7,775	)		(6,619	)
Unremitted earnings of foreign subsidiaries		(1,669	)		(2,004	)		(1,185	)
Prepaids		(580	)		(1,610	)		(1,318	)
Other		(499	)		(552	)		(588	)

Deferred tax liabilities		(25,084	)		(23,620	)		(20,958	)

Net deferred tax liability	$	(9,130	)	$	(6,208	)	$	(8,504	)

As of December 31, 2015, we had a valuation allowance of $0.9 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 various foreign subsidiaries in the amount of $3.0 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 factors including the reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.

As of December 31, 2015, we had net operating loss carry forwards totaling $1.9 million that were expected to be realized in the future periods. A total of $4.1 million has an unlimited carry forward period and will therefore not expire.

At December 31, 2015, undistributed earnings of foreign operations totaling $15.3 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 December 31, 2015, we have established liabilities for uncertain tax positions of $0.5 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 second quarter of 2016. 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):


	Seven Months Ended December 31,		Year Ended May 31,
	2015		2015			2014			2013
Balance at beginning of year	$	477	$	715		$	697		$	624
Additions based on tax positions related to prior years		62		68			110			191
Reductions based on tax positions related to prior years		—		(306	)		—			—
Reductions resulting from a lapse of the applicable statute of limitations		—		—			(92	)		(118	)

Balance at end of year	$	539	$	477		$	715		$	697

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

Recent Legislation

The Protecting Americans From Tax Hikes Act of 2015 (the PATH Act) was signed into law on December 18, 2015 and included an extension of the 50% bonus depreciation allowance, with a phase down of the bonus percentage amount for later years. The extended provision for 50% bonus depreciation specifically applies to qualifying property placed in service after December 31, 2014 and before January 1, 2018. The acceleration of deductions for the year ended December 31, 2015 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 cash taxes for the seven-month period ended December 31, 2015 by approximately $1.7 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 PATH Act also reinstated and made permanent the research and development credit retroactively from January 1, 2015. This change in legislation resulted in a permanent decrease in income tax expense for the seven-month period ended December 31, 2015 of $0.4 million.