9. Income Taxes

The components of pretax income for the years ended September 30 were as follows:



(Dollars in Thousands)	2013		2012		2011
Pretax income:
U.S.	$	(3,112)	$	21,323	$	30,160
Foreign		7,592		6,817		6,575
Total pretax income	$	4,480	$	28,140	$	36,735

The components of the provision for income taxes for the years ended September 30 were as follows:



(Dollars in Thousands)	2013		2012		2011
Current:
U.S. Federal	$	3,594	$	1,857	$	5,512
State and local		477		194		511
Foreign		2,335		2,149		2,370
Current tax provision	$	6,406	$	4,200	$	8,393
Deferred:
U.S. Federal	$	(7,011)	$	3,927	$	2,360
State and local		(378)		388		107
Foreign		(233)		(475)		667
Deferred tax provision	$	(7,622)	$	3,840	$	3,134
Income tax provision	$	(1,216)	$	8,040	$	11,527

The effective tax rates for the fiscal years ended September 30, 2013, 2012 and 2011 were (27.2%), 28.6% and 31.4%, respectively. The fiscal 2013 effective tax rate decreased due primarily to an increased realization of certain U.S. tax credits and mix of earnings by jurisdiction. The following is a reconciliation of the U.S. federal statutory rate of 35% to the effective income tax rate:



	2013		2012		2011
U.S. Federal statutory rate		35.0%		35.0%		35.0%
State and local taxes net of Federal tax benefit		-3.5%		1.3%		0.9%
Lower rates on Foreign operations		-11.1%		-3.9%		-1.4%
Non-taxed equity earnings		-30.3%		-4.0%		-2.1%
Foreign tax credit impact, net		-5.5%		-1.5%		-0.5%
R&D credit		-6.5%		-0.5%		-1.0%
Domestic production activity deduction		-6.0%		-0.5%		-0.8%
Partnership income		10.2%		1.6%		1.2%
Provision to return adjustments		-14.0%		-0.2%		0.3%
Meals and entertainment		1.8%		0.3%		0.2%
Change in deferred rate		2.0%		0.7%		-0.4%
Unremitted/non-indefinitely reinvested earnings		2.1%		0.0%		-0.1%
Other		-1.4%		0.3%		0.1%
Effective income tax rate		-27.2%		28.6%		31.4%

The tax effects of temporary differences that gave rise to deferred income tax assets and liabilities consisted of the following at September 30:



(Dollars in Thousands)	2013		2012
Deferred tax assets:
Pension accrual	$	1,391	$	2,998
Compensation expense		3,360		2,794
Transaction costs		1,133		1,187
Medical insurance claims		402		475
Retirement plans		1,896		2,251
Accruals not currently deductible		156		416
NOLs and attributes		189		81
Other		647		636
	$	9,174	$	10,838
Deferred tax liabilities:
Depreciation	$	1,745	$	1,904
Software development		14,401		14,812
Intangible asset amortization		232		7,267
Other		202		79
	$	16,580	$	24,062
Net deferred tax liability	$	(7,406)	$	(13,224)

The Company believes that the realization of deferred tax assets is more likely than not based upon the expectation the Company will generate the necessary taxable income in the future periods. Therefore, no valuation allowances have been provided.

The Company has provided for U.S. deferred income taxes and foreign withholding tax in the amount of $68 on undistributed earnings not considered permanently reinvested in its non-U.S. subsidiaries. The Company has not provided for U.S. deferred income taxes or foreign withholding tax on the remainder of undistributed earnings from its non-U.S. subsidiaries because such earnings are considered to be permanently reinvested as it is the Company’s intention to reinvest accumulated cash balances, future cash flows and profits to make capital improvements, and grow and expand its foreign operations. In accordance with this plan, cash held by certain foreign subsidiaries will not be available for U.S. Company operations, and under current laws, will not be subject to U.S. taxation. As of September 30, 2013, 2012 and 2011, permanently reinvested cumulative undistributed earnings attributable to certain foreign operations were approximately $13,085, $14,262 and $13,047, respectively. The change in the permanently reinvested cumulative undistributed earnings from fiscal 2012 to fiscal 2013 is due primarily to repatriation of funds from Mexico and translation. The Company has sufficient cash and cash equivalents available for use in the U.S. to fund current operations without drawing on the permanently reinvested funds held by its foreign operations. If in the future the Company decides to repatriate these permanently reinvested foreign earnings, it does not anticipate any significant incremental U.S. Federal and State income tax.

As of September 30, 2013, the Company's U.S. income tax returns for fiscal 2010 and subsequent years remained subject to examination by the Internal Revenue Service ("IRS"). The Company is not currently under audit by the IRS. State income tax returns generally have statute of limitations for periods between three and four years from the date of filing. The Company is currently undergoing a state income tax audit. The Company does not expect the audit to have a material impact on its consolidated financial statements. The Company is not currently under audit in any foreign jurisdictions. The Company’s foreign operations have statute of limitations on the examination of tax returns for periods between two and six years.

The Company operates in numerous taxing jurisdictions and is subject to regular examinations by various U.S. federal, state, local and foreign jurisdictions for various tax periods. The Company’s income tax positions are based on research and interpretations of the income tax laws and rulings in each of the jurisdictions in which it does business. Due to the subjectivity of interpretations of the income tax laws and rulings in each jurisdiction, the differences and interplay in tax laws between those jurisdictions, as well as the inherent uncertainty in estimating the final resolution of complex tax audit matters, the Company’s estimates of income tax liabilities may differ from actual payments or assessments.

Accounting for uncertainty in income taxes requires a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. The Company records a liability for the difference between the benefit recognized and measured for financial statement purposes and the tax position taken or expected to be taken on its tax return. To the extent that the Company’s assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made.

A reconciliation of gross unrecognized tax benefits, exclusive of interest and penalties, is as follows:



(Dollars in Thousands)	2013		2012		2011
Balance at beginning of year	$	583	$	770	$	714
Tax positions related to current year:
Gross increases		52		23		150
Tax positions related to prior periods:
Gross increases		99		127		167
Gross decreases		-		(182)		(50)
Decreases related to settlements		-		-		-
Decreases related to lapse of statute of limitations		(186)		(155)		(211)
Balance at end of year	$	548	$	583	$	770

The total amount of unrecognized tax benefits, net of federal benefit that, if recognized, would affect the effective tax rate was $507, $547 and $666, as of September 30, 2013, 2012 and 2011, respectively.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes. As of September 30, 2013 and 2012, the gross amount of interest and penalties recorded was $77 and $82, respectively. The Company does not expect that any change in the amount of unrecognized tax benefits in the next twelve months, with respect to items identified, will have a significant impact on the consolidated results of operations or the financial position of the Company. The amount of unrecognized tax benefits and the related interest and penalties expected to reverse within the next fiscal year is estimated to be approximately $285.