Income Tax Expense

12 Months Ended

Sep. 30, 2014

Income Tax Expense [Abstract]

INCOME TAX EXPENSE

8. Income Tax Expense

Total income tax expense (benefit) for the years ended September 30, 2014, 2013 and 2012 was allocated to income tax expense as follows:

(Dollars in thousands)	2014		2013		2012
Income tax expense from Continuing Operations	$	19,594		18,335		17,408
Income tax (benefit) expense from Discontinued Operations		(6,034)		(5,215)		7,397
Total income tax expense	$	13,560		13,120		24,805

The components of income from continuing operations before income taxes consisted of the following for the years ended September 30:

(Dollars in thousands)	2014		2013		2012
United States	$	56,196		43,159		46,883
Foreign		6,011		6,436		5,299
Total income before income taxes	$	62,207		49,595		52,182

The principal components of income tax expense (benefit) from continuing operations for the years ended September 30, 2014, 2013 and 2012 consist of:

(Dollars in thousands)	2014		2013		2012
Federal:
Current	$	18,756		10,723		11,144
Deferred		(2,442)		2,942		2,954
State and local:
Current		1,397		896		1,372
Deferred		(245)		642		309
Foreign:
Current		2,044		2,033		1,863
Deferred		84		1,099		(234)
Total	$	19,594		18,335		17,408

The actual income tax expense (benefit) from continuing operations for the years ended September 30, 2014, 2013 and 2012 differs from the expected tax expense for those years (computed by applying the U.S. Federal corporate statutory rate) as follows:

	2014			2013		2012
Federal corporate statutory rate		35.0	%	35.0	%	35.0	%
State and local, net of Federal benefits		2.0		2.7		3.3
Foreign		(1.7)		(1.9)		(0.7)
Research credit		(1.0)		(2.5)		(0.3)
Domestic production deduction		(2.9)		(2.5)		(2.4)
Change in uncertain tax positions		(2.9)		0.1		(3.6)
Purchase accounting adjustment		—		—		1.0
Executive compensation		1.3		1.8		0.6
Valuation allowance		1.3		4.0		0.2
Other, net		0.4		0.3		0.3
Effective income tax rate		31.5	%	37.0	%	33.4	%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at September 30, 2014 and 2013 are presented below:

(Dollars in thousands)	2014		2013
Deferred tax assets:
Inventories, long-term contract accounting, contract cost reserves and other	$	7,710		6,825
Pension and other postretirement benefits		6,974		7,417
Net operating loss carryforward — domestic		658		848
Net operating loss carryforward — foreign		4,702		3,955
Capital loss carryforward		—		240
Other compensation-related costs and other cost accruals		13,996		19,325
State credit carryforward		1,276		1,099
Total deferred tax assets		35,316		39,709
Deferred tax liabilities:
Goodwill		(14,338)		(14,576)
Acquisition assets		(57,795)		(61,403)
Depreciation, software amortization		(16,380)		(36,396)
Net deferred tax liabilities before valuation allowance		(53,197)		(72,666)
Less valuation allowance		(4,297)		(3,780)
Net deferred tax liabilities	$	(57,494)		(76,446)

The Company has a foreign net operating loss carryforward of $18.2 million at September 30, 2014, which reflects tax loss carryforwards in Brazil, Germany, India, Japan, Finland, China and the United Kingdom. $16.4 million of the tax loss carryforwards have no expiration date while the remaining $1.8 million will expire between 2016 and 2024. The Company has state net operating loss carryforwards of $0.3 million at September 30, 2014 which expire between 2020 and 2033. The Company also has net state research and other credit carryforwards of $1.3 million of which $0.9 million expires between 2025 and 2034. The remaining $0.4 million does not have an expiration date.

The valuation allowance for deferred tax assets as of September 30, 2014 and 2013 was $4.3 million and $3.8 million, respectively. The net change in the total valuation allowance for each of the years ended September 30, 2014 and 2013 was an increase of $0.5 million and an increase of $2.8 million, respectively. The Company has established a valuation allowance against state credit carryforwards of $0.4 million at both September 30, 2014 and 2013. In addition, the Company has established a valuation allowance against state net operating loss (NOL) carryforwards that are not expected to be realized in future periods of $0.3 million and $0.4 million at September 30, 2014 and 2013, respectively. Lastly, the Company has established a valuation allowance against certain NOL carryforwards in foreign jurisdictions which may not be realized in future periods. The valuation allowance established against the foreign NOL carryforwards was $3.6 million and $2.8 million at September 30, 2014, and 2013, respectively. The Company classifies its valuation allowance related to deferred taxes on a pro rata basis by taxing jurisdiction.

The Company’s foreign subsidiaries have accumulated unremitted earnings of $32.6 million and cash of $27.0 million at September 30, 2014. No deferred taxes have been provided on these accumulated unremitted earnings because these funds are not needed to meet the liquidity requirements of the Company’s U.S. operations and it is the Company’s intention to indefinitely reinvest these earnings in continuing international operations. In the event these foreign entities’ earnings were distributed, it is estimated that U.S. taxes, net of available foreign tax credits, of approximately $4.7 million would be due, which would correspondingly reduce the Company’s net earnings. No significant portion of the Company’s foreign subsidiaries’ earnings was taxed at a very low tax rate.

As of September 30, 2014, the Company had $0.5 million of unrecognized benefits (see table below), which, net of Federal benefit, if recognized, would affect the Company’s effective tax rate.

A reconciliation of the Company’s unrecognized tax benefits for the years ended September 30, 2014 and 2013 is presented in the table below:

(Dollars in millions)	2014		2013
Balance as of October 1,	$	2.2		1.8
Increases related to prior year tax positions		—		0.5
Decreases related to prior year tax positions		(0.7)		—
Increases related to current year tax positions		—		0.2
Decreases related to settlements with taxing authorities		—		(0.1)
Lapse of statute of limitations		(1.0)		(0.2)
Balance as of September 30,	$	0.5		2.2

The Company anticipates a $0.1 million reduction in the amount of unrecognized tax benefits in the next 12 months as a result of a lapse of the applicable statute of limitations. The Company’s policy is to include interest related to unrecognized tax benefits in income tax expense and penalties in operating expense. As of September 30, 2014, 2013 and 2012, the Company had accrued interest related to uncertain tax positions of zero, $0.1 million and $0.1 million, respectively, net of Federal income tax benefit, on its Consolidated Balance Sheet. No significant penalties have been accrued.

The principal jurisdictions for which the Company files income tax returns are U.S. Federal and the various city, state, and international locations where the Company has operations. The U.S. Federal tax years for the periods ended September 30, 2011 and forward remain subject to income tax examination. In the second quarter of 2014, the Internal Revenue Service completed their examination of the Company’s U.S. Federal income tax return for the period ended September 30, 2011; no adjustments were proposed. Various state tax years for the periods ended September 30, 2010 and forward remain subject to income tax examinations. The Company is subject to income tax in many jurisdictions outside the United States, none of which is individually material to the Company’s financial position, statements of cash flows, or results of operations.