Income Taxes

Income (loss) before income taxes consists of the following:




	Years Ended October 31,
	2014			2013
Domestic	$	28,200		$	30,814
Foreign	(1,009		)	1,361

Total	$	27,191		$	32,175

The components of the provision for income taxes from continuing operations were as follows:




		Years Ended October 31,
		2014			2013
Current:
	Federal	$	3,684		$	8,427
	State and local	210			1,338
	Foreign	74			261

Total current		3,968			10,026
Deferred:
	Federal	3,069			427
	State and local	58			152
	Foreign	(2,348		)	—

Total deferred		779			579

	Provision	$	4,747		$	10,605

Temporary differences and carryforwards which give rise to deferred tax assets and liabilities were comprised of the following:



		Years Ended October 31,
		2014			2013
Deferred tax assets:
	Accrued compensation and benefits	$	1,524		$	1,255
	Inventory	886			662
	State depreciation adjustments and loss carryforwards	1,739			1,266
	Pension obligations and post retirement benefits	7,766			8,255
	Foreign net operating loss	2,626			1,153
	Tax credits in foreign countries	—			573
	Other accruals, reserves and tax credits	3,032			2,806
	Goodwill and intangible amortization	9,414			3,304
	Foreign currency translation	24			—
	Interest rate swap	952			—

Total deferred tax assets		27,963			19,274
Less: Valuation allowance		(3,630)			(4,014)

Total deferred tax assets		24,333			15,260
Deferred tax liabilities:
	Fixed assets	(20,193)			(12,828)
	Prepaid expenses and other	(778)			(572)

Net deferred tax asset		$	3,362		$	1,860

Change in net deferred tax asset:
	Provision for deferred taxes	$	(779	)	$	(579	)
Purchase accounting adjustments		663			—
Unrecognized tax benefit adjustments		(64		)	(10		)
Components of other comprehensive income:
	Pension and post retirement benefits	783			(2,998		)
	Velocys investment	(53		)	—
	Interest rate swap	952			—
	Total change in net deferred tax asset	$	1,502		$	(3,587	)

As required by FASB ASC Topic 740, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.

Activities and balances of unrecognized tax benefits for 2014 and 2013 are summarized below:



	Years Ended October 31,
	2014			2013
Balance at beginning of year	$	1,183		$	1,247
Additions based on tax positions related to the current year	35			54
Reductions based on tax positions related to the current year	(5		)	—
Reductions for tax positions of prior years	(3		)	(61		)
Reductions as result of lapse of applicable statute of limitations	(142		)	(57		)

Balance at end of year	$	1,068		$	1,183

The total amount of unrecognized tax benefits that, if recognized, would affect the effective rate was $700 at October 31, 2014 and $777 at October 31, 2013. The Company recognizes interest accrued and penalties related to unrecognized tax benefits as part of income tax expense. The Company recognized $136 of benefit in 2014 and $21 of expense in 2013 for interest and penalties. The Company had accrued $893 at October 31, 2014 and $1,029 at October 31, 2013, for the payment of interest and penalties.

The Company is subject to income taxes in the U.S. federal jurisdiction, and various state, local and foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for the years ending prior to October 31, 2011 and no longer subject to non-U.S. income tax examinations for calendar years ending prior to December 31, 2009. The Company does not anticipate that within the next 12 months the total unrecognized tax benefits will significantly change due to the settlement of examinations and the expiration of statute of limitations.

In September 2013 and August 2014, the Internal Revenue Service issued final regulations governing the income tax treatment of acquisitions, dispositions, and repairs of tangible property. Taxpayers are required to follow the new regulations in taxable years beginning on or after January 1, 2014. Management is currently assessing the impact of the regulations and does not expect they will have a material impact on the Company's financial statements. The Tax Increase Prevention Act was passed into legislation on December 19, 2014. This Legislation extended the alternative fuel tax credit and the research and development tax credit for one year. Shiloh estimates this will have a favorable impact of $1,100 in the first quarter of fiscal 2015.

A valuation allowance of $3,630 remains as of October 31, 2014 for deferred tax assets whose realization remains uncertain at this time. The comparable amount of the valuation allowance at October 31, 2013 was $4,014. The net decrease in the valuation allowance of $384 relates to an opening balance sheet increase of $1,577 resulting from the Finnveden acquisition offset by a translation decrease of $152 primarily related to Swedish operating loss carry forwards, an increase of $428 related to state operating loss carry forwards, an increase of $544 related to Swedish operating loss carry forwards during the current period, a decrease of $573 for Mexican flat tax credits because legislation was enacted which eliminated the flat tax as of December 31, 2013, a decrease of $2,171 related to Mexican deferred tax assets and a decrease of $37 for the future utilization of foreign tax credits in the United States.

The Company assesses both negative and positive evidence when measuring the need for a valuation allowance. A valuation allowance has been established by the Company due to the uncertainty of realizing certain loss carry forwards, other deferred tax assets and foreign tax credits in the United States and various foreign jurisdictions. The Company believes the remaining deferred tax assets will be realizable based on projected book income, the reversals of existing taxable temporary differences and available tax planning strategies that would be implemented and generate ordinary income in the United States or foreign jurisdictions to recognize the deferred tax assets. The Company intends to maintain the valuation allowance against certain deferred tax assets until such time that sufficient positive evidence exists to support realization of the deferred tax assets. In the event the Company were to determine that it would be able to realize its deferred tax assets in the future in excess of their net recorded amount, an adjustment to the deferred tax assets would increase income in the period such determination was made. Likewise, should the Company determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made.

A reconciliation of the statutory federal income tax rate to the effective tax rate is as follows:




	Years Ended October 31,
	2014		2013
Federal income tax at statutory rate	35.0	%	35.0	%
State and local income taxes, net of federal benefit	0.7		3.5
Valuation allowance change	(6.6	)	(1.7	)
Domestic tax credits	(0.8	)	(0.8	)
Domestic production activities deduction	(2.8	)	(2.9	)
Foreign operations	(1.8	)	0.9
Stock option expense	—		0.2
Adjustment of uncertain tax positions	(0.7	)	(0.1	)
Revisions to prior period research and development tax credit calculations	(9.1	)	—
Revisions to prior period estimated income tax calculations	(0.3	)	(1.4	)
Change in legislation - Mexico	2.1		—
Other	1.8		0.3

Effective income tax rate	17.5	%	33.0	%

At October 31, 2014, the Company had Swedish foreign operating loss carryforward benefits of approximately $1,970 with a valuation allowance to the extent of their net deferred tax assets, which can be carried forward indefinitely. In addition, the Company had Mexican operating loss carry forward benefits of approximately $573 as of October 31, 2014, which will expire in 2018 or 2019. At October 31, 2013, the Company had Mexican operating loss carryforward benefits of approximately $1,153 with a valuation allowance to the extent of their net deferred tax assets. The Company has various state and local net operating loss and tax credit carryforward benefits of $1,413 and $985 with a full valuation allowance, which will expire between 2015 and 2034.

The Company paid income taxes, net of refunds, of $7,995 and $7,111 in 2014 and 2013, respectively. U.S. income taxes and foreign withholding taxes are not provided on undistributed earnings of foreign subsidiaries because it is expected such earnings will be permanently reinvested in the operations of such subsidiaries or pay down European debt. It is not practical to determine the amount of income tax liability that would result had such earnings been repatriated. As of October 31, 2014, there was $1,441 of undistributed foreign subsidiary earnings.