Interest Expense Income Taxes 2013 coMPared to 2012 Sales Gross Profit Selling, General and Administrative Expenses net sales increased 6.3% to $139.2 million for the year ended December 31, 2013, from net sales of $131.0 million in 2012 (including  sales from packaging Alternatives Corporation (“pAC”), which the Company acquired in 2012). the increase in net sales was  primarily due to an additional $10.3 million in sales from pAC—which were primarily to the medical market—as well as a 21.3% increase  in sales of our molded fiber packaging product due to increased demand for environmentally friendly packaging solutions. excluding  sales at pAC, net sales decreased 1.5% largely due to a 28% decline in sales to the aerospace and defense market due to government  cuts in defense spending. Gross profit as a percentage of sales (“Gross Margin”) increased 0.2% to 29.5% for the year ended December 31, 2013, from 29.3% in  2012. As a percentage of sales, material and direct labor collectively decreased by 0.6% in 2013, due primarily to an improved book  of business. this decrease was partially offset by an increase in overhead as a percentage of sales of 0.4% due largely to increased  depreciation expense associated with new machinery. selling, General, and Administrative expenses (“sG&A”) increased 9.0% to $23.6 million for the year ended December 31, 2013,  from $21.7 million in 2012. the increase in sG&A for the year ended December 31, 2013, is primarily due to increased sG&A at pAC.  excluding pAC, sG&A declined approximately $100,000, or 0.5% from 2012, primarily due to a reduction in incentive compensation  of approximately $700,000 partially offset by an increase in professional fees of approximately $390,000 due to higher audit and  compliance fees as well as increased expenses associated with the implementation of eRp software and an increase in net selling  expenses of approximately $300,000 due largely to the investment in additional sales resources. As a percentage of sales, sG&A  increased slightly to 17.0% for the year ended December 31, 2013, from 16.5% for the same period in 2012. the slight increase in sG&A  as a percentage of sales is primarily due to relatively fixed sG&A expenses measured against lower organic sales. Interest expense net of interest income increased to approximately $205,000 for the year ended December 31, 2013, from net  interest expense of approximately $90,000 in 2012. the increase in interest expense is primarily attributable to increased debt levels  during the year associated with financing molded fiber equipment. Interest Expense Income Taxes the Company recorded income tax expense as a percentage of income before income tax expense, of 34.4% and 34.3% for the  years ended December 31, 2013 and 2012, respectively. the slight increase in the effective tax rate for the year ended December 31,  2013, is primarily attributable to higher anticipated state taxes. the Company has deferred tax assets on its books associated with  net operating losses generated in previous years. the Company has considered both positive and negative available evidence in its  determination that the deferred tax assets are more likely than not to be realized, and has not recorded a tax valuation allowance at  December 31, 2013. the Company will continue to assess whether the deferred tax assets will be realizable and, when appropriate,  will record a valuation allowance against these assets. the amount of the net deferred tax asset considered realizable, however, could  be reduced in the near term, if estimates of future taxable income during the carry-forward period are reduced. 11 Interest expense net of interest income decreased to approximately $108,000 for the year ended December 31, 2014 from net  interest expense of approximately $205,000 in 2013. the decrease in interest expense is primarily due to a lower average debt  balance as a result of the Company’s repayment of term loans in conjunction with the execution of a new revolving credit facility in  the fourth quarter of 2013. the Company recorded income tax expense as a percentage of income before income tax expense, of 35.8% and 34.4% for the  years ended December 31, 2014 and 2013, respectively. the increase in the effective tax rate for the year ended December 31,  2014 is primarily attributable to permanent differences measured against lower pre-tax income as well as additional reserves of  approximately $150,000 for uncertain tax positions. the Company has deferred tax assets on its books associated with net operating  losses generated in previous years. the Company has considered both positive and negative available evidence in its determination  that the deferred tax assets are more likely than not to be realized, and has not recorded a tax valuation allowance at December 31,  2014. the Company will continue to assess whether the deferred tax assets will be realizable and, when appropriate, will record a  valuation allowance against these assets. the amount of the net deferred tax asset considered realizable, however, could be reduced  in the near term if estimates of future taxable income during the carry-forward period are reduced.