9.Income Taxes

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



(Dollars in Thousands)	2016		2015		2014
Pretax income:
U.S.	$	22,081	$	14,940	$	(46,061)
Foreign		6,272		6,382		5,563
Total pretax income	$	28,353	$	21,322	$	(40,498)

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



(Dollars in Thousands)	2016		2015		2014
Current:
U.S. Federal	$	(2,322)	$	2,407	$	5,581
State and local		152		405		591
Foreign		2,355		2,708		1,858
Current tax provision	$	185	$	5,520	$	8,030
Deferred:
U.S. Federal	$	8,961	$	990	$	(22,261)
State and local		770		68		(1,320)
Foreign		(17)		(305)		(249)
Deferred tax provision	$	9,714	$	753	$	(23,830)
Income tax provision	$	9,899	$	6,273	$	(15,800)

The effective tax rates for the fiscal years ended September 30, 2016, 2015 and 2014 were 34.9%, 29.4% and 39.0%, respectively. The increase in the fiscal 2016 effective tax rate was primarily due to the mix of earnings between jurisdictions with differing tax rates and the valuation allowance recorded to offset the tax impact of capital losses generated from divestitures.. The following is a reconciliation of the U.S. federal statutory rate of 35.0% to the effective income tax rate:



	2016			2015			2014
U.S. Federal statutory rate		35.0	%		35.0	%		35.0	%
State and local taxes net of Federal tax benefit		2.1	%		1.3	%		2.4	%
Effect of foreign affiliates		(2.8)	%		(4.4)	%		1.1	%
Earnings of unconsolidated affiliates		(2.0)	%		(3.2)	%		1.9	%
R&D credit		(1.0)	%		(0.4)	%		0.0	%
Domestic production activity deduction		0.0	%		(0.8)	%		0.7	%
Partnership income		1.6	%		1.9	%		(1.3)	%
Provision to return adjustments		0.1	%		(0.9)	%		(0.4)	%
Meals and entertainment		0.3	%		0.5	%		(0.3)	%
Change in deferred rate		0.0	%		0.0	%		0.1	%
Uncertain tax positions		(1.7)	%		(1.6)	%		(0.3)	%
Valuation allowance		1.5	%		0.0	%		0.0	%
Other		1.8	%		2.0	%		0.1	%
Effective income tax rate		34.9	%		29.4	%		39.0	%

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)	2016		2015
Deferred tax assets:
Post-retirement benefits	$	7,635	$	6,228
Compensation expense		4,054		3,510
NOLs and attributes		16,350		289
Intangible asset amortization		-		19,782
Cumulative translation adjustment		1,095		2,820
Other deferred tax assets		1,611		3,222
		30,745		35,851
Valuation allowance		(456)		-
Total deferred tax assets, net of allowance		30,289		35,851

Deferred tax liabilities:
Depreciation		2,322		1,085
Software development		12,156		12,400
Intangible asset amortization		4,001		-
Equity method investment		641		689
Unremitted earnings of foreign subsidiaries		53		347
Other deferred tax liabilities		-		27
		19,173		14,548
Net deferred tax asset	$	11,116	$	21,303

At September 30, 2016, the Company recorded a $13,300 state and federal net operating loss (“NOL”) deferred tax asset related to the May 2016 divestiture of IZI Medical Products, LLC, which will expire between 2022 and 2037. The Company believes that the realization of this deferred tax assets is more likely than not based upon the expectation that the Company will generate the necessary taxable income in the future periods. Therefore, no valuation allowance was recorded for this deferred tax asset.

At September 30, 2016, the Company recorded a $456 capital loss deferred tax asset related to the Ilumark GmbH entity that was divested together with IZI Medical Products, LLC. This capital loss deferred tax asset will expire in 2022. The Company believes it is more likely than not that the benefit from this deferred tax asset will not be realized. In recognition of this risk, the Company has recorded a valuation allowance of $456 against the deferred tax asset.

The Company has provided for U.S. deferred income taxes and foreign withholding tax in the amount of $53 on undistributed earnings not considered permanently reinvested in its non-U.S. subsidiaries. The Company has no indefinitely reinvested foreign earnings and profits as of 2016.

As of September 30, 2016, the Company’s U.S. income tax returns for fiscal 2013 and subsequent years remained subject to examination by the Internal Revenue Service (“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)	2016		2015		2014
Balance at beginning of year	$	1,993	$	2,917	$	2,775
Tax positions related to current year:
Gross increases		1		112		358
Tax positions related to prior periods:
Gross increases		88		81		65
Decreases related to lapse of statute of limitations		(789)		(1,117)		(281)
Balance at end of year	$	1,293	$	1,993	$	2,917

The total amount of unrecognized tax benefits, net of federal benefit that, if recognized, would affect the effective tax rate was $812, $1,274 and $1,840, as of September 30, 2016, 2015 and 2014, respectively.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes. As of September 30, 2016 and 2015, the gross amount of interest and penalties recorded was $202 and $316, respectively. The Company’s unrecognized tax benefits are primarily due to intercompany allocations between jurisdictions. 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 $559.