11.

INCOME TAXES

Income Before Income Taxes

The consolidated income before income taxes for 2014, 2013 and 2012 consists of the following (in thousands):

	2014		2013		2012
Domestic	$	98,246	$	77,465	$	48,533
Foreign		216		158		130
Total income before income taxes	$	98,462	$	77,623	$	48,663

Income Tax Expense

The consolidated income tax expense for 2014, 2013 and 2012 consists of the following components (in thousands):

	2014		2013		2012
Current
Federal	$	19,036	$	197	$	-
State		1,805		717		174
Foreign		118		130		141
	$	20,959	$	1,044	$	315
Deferred
Federal	$	12,913	$	26,753	$	(46,378)
State		3,778		3,412		(10,871)
Foreign		(118)		(115)		(34)
	$	16,573	$	30,050	$	(57,283)
Total consolidated expense (benefit)	$	37,532	$	31,094	$	(56,968)

The Company’s following table provides a reconciliation of differences from the U.S. Federal statutory rate of 35% as follows (in thousands):

	2014		2013		2012
Pretax book income	$	98,462	$	77,623	$	48,663

Federal tax expense at 35% statutory rate		34,462		27,168		17,032
State and local income taxes		4,808		3,870		2,619
Foreign tax rate differential		(206)		(41)		(14)
Benefit of domestic production deduction		(2,010)		-		-
Reversal of income tax valuation allowance against net deferred tax assets		-		-		(59,887)
Utilization of valuation allowance for net operating losses and credit carrryforwards - U.S. and states		(132)		-		(19,528)
Other		610		97		2,810
Total income tax expense (benefit)	$	37,532	$	31,094	$	(56,968)

Deferred Taxes

The Company’s deferred income taxes are primarily due to temporary differences between financial and income tax reporting for the depreciation of property, plant and equipment, amortization of intangibles, compensation adjustments, inventory adjustments, other accrued liabilities and tax credits and losses carried forward.

Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. During 2012, the Company utilized previously recognized net valuation allowances primarily due to accumulation of pretax income. Companies are required to assess whether valuation allowances should be established against their deferred tax assets based on the consideration of all available evidence, both positive and negative, using a “more likely than not” standard. In making such judgments, significant weight is given to evidence that can be objectively verified.

The Company assesses, on a quarterly basis, the realizability of its deferred tax assets by evaluating all available evidence, both positive and negative, including: (1) the cumulative results of operations in recent years, (2) the nature of recent losses, (3) estimates of future taxable income, (4) the length of operating loss carryforward periods and (5) the uncertainty associated with a possible change in ownership, which imposes an annual limitation on the use of these carryforwards.

By the end of 2012, management concluded that profitability in recent years and a business outlook showing continued profitability combined with a lengthy operating loss carryforward period, provided assurance that the future tax benefits more likely than not will be realized. Accordingly, during the fourth quarter of 2012, the Company released $59.9 million of valuation allowance against its net deferred tax assets, resulting in a benefit in the provision for income taxes. As of December 31, 2014 and 2013, the Company retained a valuation allowance of $1.3 and $1.4 million, respectively, against deferred tax assets related to various state and local operating loss carryforwards that are subject to restrictive rules for future utilization.

As of December 31, 2014, the Company has no U.S. federal tax net operating loss carryforwards (“NOLs”). The Company has various multistate income tax net operating loss carryforwards, which have been recorded as a deferred income tax asset, of approximately $4 million, before valuation allowances. These net operating loss carryforwards will expire beginning in 2016, if unused.

The components of deferred tax assets and deferred tax liabilities as of December 31, 2014 and 2013 were as follows (in thousands):

	2014		2013
Deferred tax assets
Tax credits and loss carryforwards	$	2,550	$	7,452
Accrued liabilities		6,882		6,964
Incentive compensation		17,171		16,621
Other		5,551		4,736
	$	32,154	$	35,773
Deferred tax liabilities
Property, plant and equipment		(2,858)		(295)
Intangibles		(5,565)		(4,993)
Prepaid assets		(638)		(690)
Convertible note discount		(5,117)		(6,585)
Other		(2,025)		(29)
	$	(16,203)	$	(12,592)

Net deferred tax asset before valuation allowances and reserves	$	15,951	$	23,181
Valuation allowances		(1,307)		(1,438)
Net deferred tax asset	$	14,644	$	21,743

Tax Reserves

The Company’s policy with respect to interest and penalties associated with reserves or allowances for uncertain tax positions is to classify such interest and penalties in income tax expense in the Statements of Operations. As of December 31, 2014 and 2013, the total amount of unrecognized income tax benefits was approximately $11.0 million for each period, respectively, all of which, if recognized, would impact the effective income tax rate of the Company. As of December 31, 2014 and 2013, the Company had recorded a total of $0.3 and $0.4 million for each period respectively of accrued interest and penalties related to uncertain tax positions. The Company foresees no significant changes to the facts and circumstances underlying its reserves and allowances for uncertain income tax positions as reasonably possible during the next 12 months. As of December 31, 2014, the Company is subject to unexpired statutes of limitation for U.S. federal income taxes for the years 2002 through 2014. The Company is also subject to unexpired statutes of limitation for Indiana state income taxes for the years 2002 through 2014.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands) and all balances as of December 31, 2014 are included in either Other Noncurrent Liabilities or Current Deferred Income Taxes in the Company’s Consolidated Balance Sheet:

Balance at January 1, 2013	$	10,980

Decrease in prior year tax positions		(9)

Balance at December 31, 2013	$	10,971

Decrease in prior year tax positions		(323)

Balance at December 31, 2014	$	10,648