INCOME TAXES

Income from continuing operations before income tax expense was as follows (in thousands):



	For the Years Ended March 31,
	2014		2013		2012
United States	$	18,112	$	13,468	$	19,262
Foreign	9,588		9,169		5,983
	$	27,700	$	22,637	$	25,245

The following table summarizes the provision for U.S. federal, state and foreign taxes on income from continuing operations (in thousands):



	For the Years Ended March 31,
	2014		2013			2012
Current:
Federal	$	4,830	$	7,871		$	7,296
State	481		876			726
Foreign	1,582		1,513			987
	6,893		10,260			9,009
Deferred:
Federal	1,978		(1,917		)	(63		)
State	265		(1,294		)	70
	2,243		(3,211		)	7
	$	9,136	$	7,049		$	9,016

The differences between the statutory and effective federal income tax rates on income from continuing operations before income taxes were as follows:



	For the Years Ended March 31,
	2014		2013		2012
U.S. federal statutory rate	35.0	%	35.0	%	35.0	%
State income taxes, less federal benefit	1.9		1.4		2.1
Changes in tax reserves and valuation allowance	1.6		(3.1	)	0.1
Nondeductible goodwill	—		2.5		—
Permanent book/tax differences (primarily §199 deduction)	(2.2	)	(1.6	)	(0.7	)
Other, net	(3.3	)	(3.1	)	(0.8	)
	33.0	%	31.1	%	35.7	%

The Company receives distributions from its foreign operations and, therefore, does not assume that the income from operations of its foreign subsidiaries will be permanently reinvested.

Income tax benefits related to the exercise of stock options and vesting of restricted stock units reduced current taxes payable by $1,175,000, $290,000 and $99,000 in fiscal 2014, 2013 and 2012, respectively.

Deferred taxes are recorded based upon differences between the financial statement and tax bases of assets and liabilities and available net operating loss and credit carryforwards. The following temporary differences gave rise to net deferred income tax assets (liabilities) as of March 31, 2014 and 2013 (in thousands):



	March 31,
	2014			2013
Deferred income tax assets:
Accounts receivable	$	196		$	332
Inventories	2,852			2,806
Accrued expenses	3,093			3,016
State net operating loss and credit carryforwards	6,031			5,992
Share-based compensation	1,718			1,861
Intangibles	2,110			3,031
	16,000			17,038
Valuation allowance	(5,815		)	(5,467		)
	10,185			11,571
Deferred income tax liabilities:
Property, plant and equipment	1,248			1,823
Unremitted earnings of foreign subsidiaries	2,308			986
Other	250			268
	3,806			3,077
Net deferred income tax asset	$	6,379		$	8,494

At March 31, 2014 and 2013, the Company had potential state income tax benefits of $6,315,000 (net of federal tax of $3,400,000) and $6,158,000 (net of federal tax of $3,316,000), respectively, from state deferred tax assets and state net operating loss carryforwards that expire in various years through 2034. At March 31, 2014 and 2013, the Company provided valuation allowances of $5,815,000 and $5,467,000, respectively. The valuation allowance reflects management’s assessment of the portion of the deferred tax asset that more likely than not will not be realized through future taxable earnings or implementation of tax planning strategies. The decrease in the state net operating loss in fiscal 2013 primarily related to the expiration of a state net operating loss carryforward that had been offset by a full valuation allowance. During fiscal 2013, the Company released a portion of its valuation allowance associated with state net operating losses as it was determined it was more likely than not the net operating losses would be utilized prior to expiration.

As of March 31, 2012, the Company reduced its deferred income tax assets related to share-based compensation by $2,585,000 due to the expiration of certain stock options. The corresponding non-cash charge had no impact on the consolidated statement of operations and reduced additional paid-in capital as the Company has a sufficient hypothetical additional paid-in capital pool in accordance with the applicable income tax accounting literature. Of the $2,585,000, recorded in fiscal 2012, approximately $718,000 related to expirations which occurred in fiscal 2012. The remainder of $1,867,000 related to expirations prior to fiscal 2012. The correction of this item did not have a material impact on the Company’s consolidated financial statements. Management evaluated the quantitative and qualitative impact of the correction on previously reported periods as well as the year ended March 31, 2012. Based on this evaluation, management concluded that the adjustment was not material to the consolidated financial statements. As of March 31, 2014 and 2013, the Company reduced its deferred income tax asset related to share-based compensation by $35,000 and $549,000, respectively, due to the expiration of certain stock options during fiscal 2014 and 2013.

Uncertain tax positions are recognized and measured under provisions in ASC 740. These provisions require that the Company recognize in its consolidated financial statements the impact of a tax position, if it is more likely than not that such position will be sustained on audit, based solely on the technical merits of the position. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):



	March 31,
	2014		2013
Gross unrecognized tax benefits at April 1	$	1,276	$	1,108
Additions based on tax positions related to the current year	162		168
Gross unrecognized tax benefits at March 31	$	1,438	$	1,276

The total amount of gross unrecognized tax benefits at March 31, 2014 of $1,438,000 was classified in long-term obligations in the accompanying consolidated balance sheet and the amount that would favorably affect the effective tax rate in future periods, if recognized, is $935,000. The Company does not anticipate any significant changes to the amount of gross unrecognized tax benefits in the next 12 months.

Consistent with the Company’s historical financial reporting, the Company recognizes potential accrued interest and/or penalties related to unrecognized tax benefits in income tax expense in the consolidated statements of operations. Approximately $544,000 of interest and penalties are accrued at March 31, 2014, $110,000 of which was recorded during the current year.

The Company is subject to U.S. federal income tax as well as income tax in multiple state and foreign jurisdictions. The Company’s federal tax return for the year ended March 31, 2009 was examined by the Internal Revenue Service and settled with no adjustments. State and foreign income tax returns remain open back to March 31, 2008 in major jurisdictions in which the Company operates.