7. INCOME TAXES

In determining the provision for income taxes, the Company uses an estimated annual effective tax rate that is based on the annual income, statutory tax rates and permanent differences between book and tax. This includes recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns to the extent pervasive evidence exists that they will be realized in future periods. The deferred tax balances are adjusted to reflect tax rates by tax jurisdiction, based on currently enacted tax laws, which are expected to be in effect in the years in which the temporary differences are expected to reverse. In accordance with the Company’s income tax policy, significant or unusual items are separately recognized when they occur.

The components of the gross liabilities related to unrecognized tax benefits and the related deferred tax assets are as follows:



(in thousands)	June 30,
	2013		2012
Gross unrecognized tax benefits	$	1,085	$	1,000
Accrued interest and penalties		425		365
Gross liabilities related to unrecognized tax benefits	$	1,510	$	1,365

Deferred tax assets	$	440	$	350

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



(in thousands)		2013		2012		2011
Balance at July 1	$	1,000	$	970	$	995
Additions based on tax positions related to the current year		265		207		193
Additions for tax positions of prior years		100		0		41
Reductions for tax positions of prior years		(280)		(177)		(259)
Balance at June 30	$	1,085	$	1,000	$	970

The Company records interest and penalties related to income taxes as income tax expense in the consolidated statements of income. The Company does not expect that there will be any positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next twelve months.

The income tax provision (benefit) is as follows for the years ended June 30:



(in thousands)	2013		2012		2011
Federal- current	$	6,750	$	6,969	$	5,313
State - current		566		608		423
Deferred		414		23		54
Total	$	7,730	$	7,600	$	5,790

A reconciliation between the U.S. federal statutory tax rate and the effective tax rate is as follows for the years ended June 30:



	2013		2012		2011
Federal statutory tax rate	35.0	%	35.0	%	35.0	%
State taxes, net of federal effect	2.6		2.9		2.6
Other	(0.6)		(1.1)		(1.9)
Effective tax rate	37.0	%	36.8	%	35.7	%

The effective tax rate for the fiscal years ended June 30, 2013, 2012, 2011 was 37.0%, 36.8% and 35.7%, respectively. The changes in effective tax rates are primarily due to the change in provision for uncertain tax positions related to various state taxing jurisdictions, the lower benefit of the Domestic Manufacturing Deduction under Section 199 (DMD), which provides a tax benefit on U.S. based manufacturing, and the limitation on executive compensation deduction.

The primary components of deferred tax assets and (liabilities) are as follows:



(in thousands)	June 30, 2013				June 30, 2012
	Current		Long-term		Current		Long-term
Accounts receivable	$	590	$	-	$	710	$	-
Inventory		1,530		-		1,390		-
Self -insurance		500		-		480		-
Employee benefits		800		-		480		-
Accrued expenses		550		-		690		-
Property, plant and equipment		-		(1,150)		-		(860)
Supplemental retirement plans		1,000		810		-		2,430
Other		-		1,530		-		1,590
Total	$	4,970	$	1,190	$	3,750	$	3,160

The Company is subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. Generally, tax years 2009–2012 remain open to examination by the Internal Revenue Service or other taxing jurisdictions to which we are subject.