Income Taxes
Income (loss) before provision for (benefit from) income taxes consists of the following:
|
| | | | | | | | | | |
| | Fiscal Years Ended July 31, |
| | 2017 | | 2016 | | 2015 |
U.S. | | $ | 23,732,000 |
| | (7,666,000 | ) | | 33,425,000 |
|
Foreign | | 1,749,000 |
| | (526,000 | ) | | 578,000 |
|
| | $ | 25,481,000 |
| | (8,192,000 | ) | | 34,003,000 |
|
The provision for (benefit from) income taxes included in the accompanying Consolidated Statements of Operations consists of the following:
|
| | | | | | | | | | |
| | Fiscal Years Ended July 31, |
| | 2017 | | 2016 | | 2015 |
Federal – current | | $ | (441,000 | ) | | 2,297,000 |
| | 12,367,000 |
|
Federal – deferred | | 8,399,000 |
| | (2,930,000 | ) | | (2,342,000 | ) |
| | | | | | |
State and local – current | | 608,000 |
| | 408,000 |
| | 931,000 |
|
State and local – deferred | | 659,000 |
| | (310,000 | ) | | (25,000 | ) |
| | | | | | |
Foreign – current | | 413,000 |
| | 81,000 |
| | (173,000 | ) |
Foreign – deferred | | 16,000 |
| | — |
| | — |
|
Provision for (benefit from) income taxes | | $ | 9,654,000 |
| | (454,000 | ) | | 10,758,000 |
|
The provision for (benefit from) income taxes differed from the amounts computed by applying the U.S. Federal income tax rate as a result of the following:
|
| | | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended July 31, |
| | 2017 | | 2016 | | 2015 |
| | Amount | | Rate | | Amount | | Rate | | Amount | | Rate |
Computed “expected” tax expense | | $ | 8,919,000 |
| | 35.0 | % | | (2,867,000 | ) | | 35.0 | % | | 11,901,000 |
| | 35.0 | % |
Increase (reduction) in income taxes resulting from: | | |
| | |
| | |
| | |
| | |
| | |
|
State and local income taxes, net of Federal benefit | | 1,257,000 |
| | 4.9 |
| | 23,000 |
| | (0.3 | ) | | 720,000 |
| | 2.1 |
|
Nondeductible stock-based compensation | | 78,000 |
| | 0.3 |
| | 68,000 |
| | (0.8 | ) | | 86,000 |
| | 0.2 |
|
Domestic production activities deduction | | (269,000 | ) | | (1.1 | ) | | (198,000 | ) | | 2.4 |
| | (1,030,000 | ) | | (3.0 | ) |
Research and experimentation credits | | (919,000 | ) | | (3.6 | ) | | (1,106,000 | ) | | 13.5 |
| | (793,000 | ) | | (2.3 | ) |
Acquisition-related tax contingencies | | — |
| | — |
| | 1,962,000 |
| | (24.0 | ) | | — |
| | — |
|
Nondeductible transaction costs | | — |
| | — |
| | 1,279,000 |
| | (15.6 | ) | | — |
| | — |
|
Foreign income taxes | | (151,000 | ) | | (0.6 | ) | | 289,000 |
| | (3.5 | ) | | (372,000 | ) | | (1.1 | ) |
Other | | 739,000 |
| | 3.0 |
| | 96,000 |
| | (1.2 | ) | | 246,000 |
| | 0.7 |
|
Provision for (benefit from) income taxes | | $ | 9,654,000 |
| | 37.9 | % | | (454,000 | ) | | 5.5 | % | | 10,758,000 |
| | 31.6 | % |
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at July 31, 2017 and 2016 are presented below:
|
| | | | | | | |
| | 2017 | | 2016 |
Deferred tax assets: | | | | |
Inventory and warranty reserves | | $ | 7,854,000 |
| | 8,383,000 |
|
Compensation and commissions | | 3,807,000 |
| | 5,842,000 |
|
Federal, state and foreign research and experimentation credits | | 16,286,000 |
| | 16,364,000 |
|
Stock-based compensation | | 7,767,000 |
| | 5,743,000 |
|
Acquisition-related contingent liabilities | | 4,687,000 |
| | 12,929,000 |
|
Federal and state NOLs | | 19,880,000 |
| | 25,760,000 |
|
Other | | 11,416,000 |
| | 10,885,000 |
|
Less valuation allowance | | (8,633,000 | ) | | (9,624,000 | ) |
Total deferred tax assets | | 63,064,000 |
| | 76,282,000 |
|
Deferred tax liabilities: | | |
| | |
|
Plant and equipment | | (1,309,000 | ) | | (1,882,000 | ) |
Intangibles | | (79,061,000 | ) | | (84,198,000 | ) |
Total deferred tax liabilities | | (80,370,000 | ) | | (86,080,000 | ) |
Net deferred tax (liabilities) assets | | $ | (17,306,000 | ) | | (9,798,000 | ) |
We provide for income taxes under the provisions of FASB ASC 740 "Income Taxes." FASB ASC 740 requires an asset and liability based approach in accounting for income taxes. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of them will not be realized. If management determines that it is more likely than not that some or all of its deferred tax assets will not be realized, a valuation allowance will be recorded against such deferred tax assets.
At July 31, 2017, we had approximately $48,986,000 of U.S. Federal net operating loss carryforwards reflected in deferred tax assets. Of the total loss carryforwards, approximately $46,933,000, which were generated by TCS in calendar 2013 and the tax period from January 1, 2016 to February 23, 2016, are usable at a rate of approximately $23,910,000 per year and will begin to expire in 2033. Approximately $1,589,000 is the remaining net operating loss carryforwards acquired in an acquisition by TCS in 2001, which are usable at the rate of $1,401,000 per year and will expire in 2021 if unused at that time. The remaining U.S. Federal net operating loss carryforwards generated in fiscal year 2016 of approximately $464,000 will expire in 2036.
At July 31, 2017, we had Federal alternative minimum tax credit carryforwards of approximately $2,652,000, which are available to offset future regular Federal taxes. We have Federal research and experimentation credits of approximately $9,769,000 that will begin to expire in 2019. The timing and manner in which we may utilize net operating loss carryforwards and tax credits in future tax years will be limited by the amounts and timing of future taxable income and by the application of the ownership change rules under Section 382 and 383 of the Internal Revenue Code.
We have state net operating loss carryforwards available of approximately $2,735,000 which expire through 2036, utilization of which will be limited in a manner similar to the Federal net operating loss carryforwards. We believe that it is more likely than not that the benefit from certain state net operating loss carryforwards will not be realized. In recognition of this risk, we have provided a valuation allowance of approximately $1,553,000 on the deferred tax assets relating to these state net operating loss carryforwards. We have state research and experimentation credits of approximately $5,540,000 expiring through 2036. We believe that it is more likely than not that the benefit from certain research and experimentation credits will not be realized. In recognition of this risk, we have provided a valuation allowance of approximately $5,472,000 on the deferred tax assets relating to these state credits.
At July 31, 2017 and 2016, our foreign deferred tax assets relating to research and experimentation credits have been offset by a valuation allowance as they may not be utilized in a future period. Our foreign earnings and profits are insignificant and, as such, we have not recorded any deferred tax liability on unremitted foreign earnings.
We must generate approximately $169,100,000 of taxable income in the future to fully utilize our net deferred tax assets as of July 31, 2017. Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets. In addition, at July 31, 2017, we had a hypothetical additional paid-in capital ("APIC") pool related to stock-based compensation of $16,267,000. On August 1, 2017, we adopted FASB ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which amends the accounting for employee share-based payment transactions to require recognition of the tax effects resulting from the settlement of stock-based awards as income tax expense or benefit in the income statement in the reporting period in which they occur. The adoption of this ASU is discussed in more detail in Note (11) "Stock-Based Compensation."
At July 31, 2017 and 2016, total unrecognized tax benefits were $8,681,000 and $9,171,000, respectively, including interest of $95,000 and $63,000, respectively. At July 31, 2017, $2,515,000 of our unrecognized tax benefits were recorded as non-current income taxes payable in our Consolidated Balance Sheet. The remaining unrecognized tax benefits of $6,166,000 were presented as an offset to the associated non-current deferred tax assets in our Consolidated Balance Sheet. At July 31, 2016, $2,992,000 of our unrecognized tax benefits were recorded as non-current income taxes payable in our Consolidated Balance Sheet. The remaining unrecognized benefit of $6,179,000 was presented as an offset to the associated non-current deferred tax assets in our Consolidated Balance Sheet. Of the total unrecognized tax benefits, $7,727,000 and $8,261,000 at July 31, 2017 and 2016, respectively, net of the reversal of the Federal benefit recognized as a deferred tax asset relating to state reserves, would positively impact our effective tax rate, if recognized. Unrecognized tax benefits result from income tax positions taken or expected to be taken on our income tax returns for which a tax benefit has not been recorded in our financial statements. We do not expect that there will be any significant changes to our total unrecognized tax benefits within the next twelve months.
Our policy is to recognize interest and penalties relating to uncertain tax positions in income tax expense. The following table summarizes the activity related to our unrecognized tax benefits for fiscal years 2017, 2016 and 2015 (excluding interest):
|
| | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
Balance at beginning of period | | $ | 9,108,000 |
| | 2,728,000 |
| | 2,703,000 |
|
Increase related to current period | | 587,000 |
| | 2,487,000 |
| | 410,000 |
|
Increase related to prior periods | | 86,000 |
| | 4,490,000 |
| | 144,000 |
|
Expiration of statute of limitations | | (404,000 | ) | | (580,000 | ) | | (468,000 | ) |
Decrease related to prior periods | | (791,000 | ) | | (17,000 | ) | | (61,000 | ) |
Balance at end of period | | $ | 8,586,000 |
| | 9,108,000 |
| | 2,728,000 |
|
Our federal income tax returns for fiscal 2015 and 2016 are subject to potential future Internal Revenue Service ("IRS") audits. None of our state income tax returns prior to fiscal 2013 are subject to audit. TCS’s federal income tax returns for calendar years 2013 through 2015 and the tax period from January 1, 2016 to February 23, 2016 are subject to potential future IRS audits. None of TCS’s state income tax returns prior to calendar year 2012 are subject to audit. Future tax assessments or settlements could have a material adverse effect on our consolidated results of operations and financial condition.