H. Income Taxes

The components of the income tax provision were as follows (in thousands):

	Year Ended September 30,
	2016			2015			2014
Current:
Federal	$	(1,395	)	$	2,638		$	12,184
State		449			699			2,226
Foreign		899			(306	)		(130	)
		(47	)		3,031			14,280
Deferred:
Federal		1,923			3,296			(1,798	)
State		47			420			(311	)
Foreign		360			6,805			(1,103	)
		2,330			10,521			(3,212	)
Total income tax provision	$	2,283		$	13,552		$	11,068

Income before income taxes was as follows (in thousands):

	Year Ended September 30,
	2016		2015			2014
U.S.	$	5,087	$	33,549		$	35,131
Other than U.S.		12,706		(10,558	)		(4,443	)
Income before income taxes	$	17,793	$	22,991		$	30,688

A reconciliation of the statutory U.S. income tax rate and the effective income tax rate, as computed on earnings before income tax provision in each of the three years presented in the Consolidated Statements of Operations, was as follows:

	Year Ended September 30,
	2016			2015			2014
Statutory rate		35	%		35	%		35	%
State income taxes, net of federal benefit		2			3			3
Research and development credit		(8	)		(21	)		—
Foreign rate differential		(8	)		4			1
Domestic production activities deduction		—			(3	)		(3	)
Foreign valuation allowance		(11	)		43			—
Other		3			(2	)		—
Effective rate		13	%		59	%		36	%

Our provision for income taxes reflects an effective tax rate on pre-tax earnings of 13% in Fiscal 2016 compared to 59% and 36% in Fiscal 2015 and 2014, respectively. The effective tax rate for Fiscal 2016 was favorably impacted by the statutory tax rates in the United Kingdom (U.K.) and Canada and the relative amounts of income earned in those jurisdictions, as well as the utilization of net operating loss carryforwards in Canada that have been fully reserved with a valuation allowance. Additionally, the effective tax rate for Fiscal 2016 was favorably impacted by a $0.8 million discrete item recorded in the first quarter of Fiscal 2016 related to the retroactive reinstatement of the Research and Development Tax Credit (R&D Tax Credit) for the previously expired period from January 1, 2015 to September 30, 2015. On December 18, 2015, the “Protecting Americans from Tax Hikes Act of 2015” was enacted which retroactively reinstated and made permanent the R&D Tax Credit. The effective tax rate for Fiscal 2015 was adversely impacted by the establishment of a valuation allowance against our Canadian deferred tax assets during the second quarter of Fiscal 2015. This was partially offset by the release of a $4.1 million FIN 48 reserve related to the R&D Tax Credit upon closing an IRS audit. We also recorded a $0.6 million discrete item in Fiscal 2015 that was also related to the retroactive reinstatement of the R&D Tax Credit referred to above. The effective tax rate for Fiscal 2014 approximated the combined U.S. federal and state statutory rate.

We have not recorded deferred income taxes on $21.5 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 2011 – 2015, United Kingdom 2014 – 2015 and the United States 2013 and 2015.

The net deferred income tax asset was comprised of the following (in thousands):

	September 30,
	2016			2015
Current deferred income taxes:
Gross assets	$	4,384		$	3,910
Gross liabilities		(378	)		—
Net current deferred income tax asset		4,006			3,910
Noncurrent deferred income taxes:
Gross assets		16,170			5,005
Gross liabilities		(16,308	)		(2,717	)
Net noncurrent deferred income tax asset (liability)		(138	)		2,288
Net deferred income tax asset	$	3,868		$	6,198

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,
	2016			2015
Deferred Tax Assets:
Net operating loss	$	10,453		$	9,877
Uniform capitalization and inventory		1,596			1,895
Deferred compensation		1,853			1,848
Stock-based compensation		760			993
Reserve for accrued employee benefits		1,679			1,482
Warranty accrual		1,388			915
Goodwill		345			398
Postretirement benefits liability		503			—
Allowance for doubtful accounts		220			166
Accrued legal		294			60
Credit carryforwards		1,292			1,329
Other		171			8
Deferred tax assets		20,554			18,971
Deferred Tax Liabilities:
Depreciation and amortization		(8,247	)		(2,705	)
Other		—			(12	)
Deferred tax liabilities		(8,247	)		(2,717	)

Less: valuation allowance		(8,439	)		(10,056	)
Net deferred tax asset	$	3,868		$	6,198

At September 30, 2016, we had $39 million of gross foreign net operating loss carryforwards, the majority of which are subject to a 20-year carryforward period and will begin to expire in 2031. During Fiscal 2015, we established a valuation allowance in the amount of $9.3 million against Canadian net deferred tax assets. 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. Due to the historical Canadian losses, and the losses that we projected at the time of determination, we were required under the more-likely-than-not accounting standard to record a valuation allowance against the Canadian net deferred tax assets because we anticipated that we may not be able to realize the benefits of the net operating loss carryforwards and other deductible differences.

A rollforward of the valuation allowance for the past three years is summarized below:

Balance at September 30, 2013	$	135
Charged to cost and expenses		80
Charged to other accounts		688
Balance at September 30, 2014	$	903
Charged to cost and expenses		10,048
Charged to other accounts		(895	)
Balance at September 30, 2015	$	10,056
Charged to cost and expenses		(1,934	)
Charged to other accounts		317
Balance at September 30, 2016	$	8,439

A reconciliation of the beginning and ending amount of the unrecognized tax benefits follows (in thousands):

	Year Ended September 30,
	2016			2015			2014
Balance at beginning of period	$	784		$	4,026		$	3,845
Increases related to tax positions taken during the current period		293			954			225
Increases related to tax positions taken during a prior period		―			2			14
Decreases related to expiration of statute of limitations		(31	)		(49	)		(58	)
Decreases related to settlement with taxing authorities		―			(4,149	)		—
Balance at end of period	$	1,046		$	784		$	4,026

Our continuing 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, 2016 was not material.

During Fiscal 2013, prior year U.S. federal income tax returns were amended to reflect increased R&D Credits and unrecognized tax benefits related to these refund claims were recorded. These amended returns, along with the refund claims, were subject to an Internal Revenue Service audit which was closed during the second quarter of Fiscal 2015 resulting in a $4.1 million tax benefit. Due to the expiration of certain federal statutes of limitations, management believes that, within the next 12 months, it is reasonably possible that the unrecognized tax benefits will decrease by approximately 32%.

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. Although timing of the resolution and/or closure of audits is uncertain, we believe it is probable that our unrecognized tax benefits could decrease by approximately 33% in the next 12 months due to an audit resolution.