Income Taxes

Income tax expense (benefit) consists of:



	Fiscal Year Ended June 30,
	2013			2012			2011
	(in thousands)
Current:
Federal	$	32,387		$	37,736		$	34,782
State	993			1,376			248
Foreign	3,921			3,703			5,008
Total current	37,301			42,815			40,038
Deferred:
Federal	(10,200		)	(830		)	(168		)
State	(519		)	(44		)	(9		)
Foreign	(8,218		)	(5,018		)	(1,498		)
Total deferred	(18,937		)	(5,892		)	(1,675		)
Provision for income taxes	$	18,364		$	36,923		$	38,363

A reconciliation of the U.S. Federal income tax expense at a statutory rate of 35% to actual income tax expense, excluding any other taxes related to extraordinary gain is as follows:



	Fiscal Year Ended June 30,
	2013			2012			2011
	(in thousands)
U.S. Federal income tax at statutory rate	$	18,559		$	38,924		$	39,160
Increase (decrease) in income taxes due to:
State and local income taxes, net of Federal benefit	523			1,026			625
Tax credits	(1,629		)	(1,122		)	(312		)
Valuation allowance	353			24			(195		)
Effect of foreign operations, net	(1,342		)	(2,309		)	(2,054		)
Stock compensation	(148		)	86			239
Goodwill impairment	1,139			—			—
Other	909			294			900
Provision for income taxes	$	18,364		$	36,923		$	38,363

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are presented below:



	June 30,
	2013			2012
	(in thousands)
Deferred tax assets derived from:
Allowance for accounts receivable	$	5,958		$	6,456
Inventories	9,708			7,336
Nondeductible accrued expenses	375			512
Net operating loss carryforwards	4,065			2,931
Tax credits	1,021			583
Timing of amortization deduction from goodwill	6,403			1,795
Deferred compensation	5,205			4,331
Stock compensation	5,537			5,631
Timing of depreciation and other deductions for building and equipment	10,152			98
Total deferred tax assets	48,424			29,673
Valuation allowance	(893		)	(541		)
Total deferred tax assets, net of allowance	47,531			29,132
Deferred tax liabilities derived from:
Timing of amortization deduction from goodwill	(3,938		)	(3,505		)
Timing of amortization deduction from intangible assets	(2,506		)	(4,130		)
Total deferred tax liabilities	(6,444		)	(7,635		)
Net deferred tax assets	$	41,087		$	21,497

The components of pretax earnings are as follows:



	Fiscal Year Ended June 30,
	2013			2012		2011
	(in thousands)
Domestic	$	64,581		$	103,711	$	96,436
Foreign	(11,555		)	7,500		15,450
Worldwide pretax earnings	$	53,026		$	111,211	$	111,886

At June 30, 2013 , the Company has (i) gross net operating loss carry forwards of approximately $0.1 million for U.S. Federal income tax purposes that will begin to expire in 2020; (ii) gross net operating loss carry forwards of approximately $0.9 million for state income tax purposes; (iii) foreign gross net operating loss carry forwards of approximately $11.9 million; (iv) state income tax credit carry forwards of approximately $0.2 million that will begin to expire in 2016; (v) withholding tax credits of approximately $0.8 million; and foreign tax credits of $0.1 million (vi). As of June 30, 2013, the Company reversed $0.1 million of the valuation reserve against foreign net operating loss carry-forwards. The Company maintains a $0.1 million valuation allowance for state net operating losses, and a $0.8 million valuation allowance for withholding tax credits, where it was determined that, in accordance with ASC 740, it is more likely than not that they cannot be utilized.

During the year, the Company reviewed and modified its policy toward permanently reinvested foreign earnings. The Company has provided for U.S. income taxes for the current earnings of its Canadian subsidiary. Earnings from all other geographies will continue to be considered retained indefinitely for reinvestment. The Company has not provided U.S. income taxes for undistributed earnings of foreign subsidiaries that are considered to be retained indefinitely for reinvestment. The distribution of these earnings would result in additional foreign withholding taxes and additional U.S. federal income taxes to the extent they are not offset by foreign tax credits. It has been the practice of the Company to reinvest those earnings in the business outside the United States. These undistributed earnings amounted to approximately $65.6 million at June 30, 2013. If these earnings were remitted to the U.S. they would be subject to income tax. The tax, after foreign tax credits, is estimated to be approximately $11.8 million.

Recent financial results in Europe have generated pre-tax losses, primarily the result of our European Communications business. To the extent the Europe Communications business does not return to profitability as expected, this could affect the valuation of certain deferred tax assets. In the judgment of management, it is more likely than not that the deferred tax asset will be realized.

As of June 30, 2013, the Company had gross unrecognized tax benefits of $1.0 million, $0.7 million of which, if recognized, would affect the effective tax rate. This reflects a decrease of $0.2 million on a net basis over the prior fiscal year. The Company does not expect that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next twelve months.

The Company recognizes interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying Consolidated Income Statement. Accrued interest and penalties are included within the related tax liability line in the Consolidated Balance Sheet. The total amount of interest and penalties accrued, but excluded from the table below for the years ending 2013, 2012 and 2011 were $0.9 million, $1.0 million and $0.9 million, respectively. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	June 30,
	2013			2012			2011
	(in thousands)
Beginning Balance	$	1,257		$	1,181		$	1,279
Additions based on tax positions related to the current year	240			163			173
Additions for tax positions of prior years	—			—			—
Reduction for tax positions of prior years	(463		)	(87		)	(271		)
Settlements	—			—			—
Ending Balance	$	1,034		$	1,257		$	1,181

The Company conducts business globally and, as a result, one or more of its subsidiaries files income tax returns in the U.S. federal, various state, local and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities in countries in which it operates. With few exceptions, the Company is no longer subject to state and local, or non-U.S. income tax examinations by tax authorities for tax years before 2009.