The provision (benefit) for income taxes from continuing operations consists of the following (in thousands):
|
| | | | | | | | | | | | |
| | Year Ended September 30, |
| | 2017 | | 2016 | | 2015 |
Current: | | | | | | |
Federal | | $ | 642 |
| | $ | — |
| | $ | (320 | ) |
Foreign | | 897 |
| | 12 |
| | 27 |
|
State | | 37 |
| | — |
| | — |
|
| | 1,576 |
| | 12 |
| | (293 | ) |
Deferred: | | | | | | |
Federal | | (891 | ) | | (378 | ) | | (1,981 | ) |
Foreign | | 1,356 |
| | (195 | ) | | (505 | ) |
State | | 96 |
| | 37 |
| | (127 | ) |
| | 561 |
| | (536 | ) | | (2,613 | ) |
Valuation reserves: | | | | | | |
Federal | | 1,178 |
| | 571 |
| | 54 |
|
Foreign | | (1,178 | ) | | (504 | ) | | (104 | ) |
State | | — |
| | — |
| | (4 | ) |
| | — |
| | 67 |
| | (54 | ) |
Total income tax expense (benefit) | | $ | 2,137 |
| | $ | (457 | ) | | $ | (2,960 | ) |
Components of net earnings (loss) before income taxes are:
|
| | | | | | | | | | | | |
| | Year Ended September 30, |
Earnings (loss) | | 2017 | | 2016 | | 2015 |
Domestic | | $ | (4,569 | ) | | $ | (2,768 | ) | | $ | (7,914 | ) |
Foreign | | 10,738 |
| | 1,614 |
| | (65 | ) |
Total | | $ | 6,169 |
| | $ | (1,154 | ) | | $ | (7,979 | ) |
The Company accounts for its deferred tax assets and liabilities, including excess tax benefits of share-based payments, based on the tax ordering of deductions to be used on its tax returns. The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities are as follows (in thousands):
|
| | | | | | | | |
| | September 30, |
| | 2017 | | 2016 |
Deferred tax asset: | | | | |
Reserves and accruals | | $ | 4,575 |
| | $ | 4,054 |
|
Tax benefits of share-based payments | | 518 |
| | 543 |
|
NOL and other carry forwards | | 869 |
| | 1,779 |
|
Unrealized changes in value of derivatives to equity | | 53 |
| | 61 |
|
Deferred tax liability: | | | | |
Accumulated depreciation | | (123 | ) | | (108 | ) |
Intangible assets | | (1,742 | ) | | (2,016 | ) |
Translation adjustment to equity | | 405 |
| | 861 |
|
Net deferred tax asset | | $ | 4,555 |
| | $ | 5,174 |
|
Net deferred tax: | | | | |
Current asset | | $ | 4,770 |
| | $ | 3,934 |
|
Long-term asset | | 1,299 |
| | 3,001 |
|
Long-term liability | | (1,514 | ) | | (1,761 | ) |
Net deferred tax asset | | $ | 4,555 |
| | $ | 5,174 |
|
At September 30, 2017, the Company has approximately $2.4 million of pre-tax carryforwards in foreign jurisdictions, the majority of which relate to net operating loss carryforwards which do not expire.
At September 30, 2017, the Company had valuation reserves of approximately $197,000 for deferred tax assets for capital loss carry forwards and changes in the carrying value of its investment in Proditec, and offsetting amounts for foreign deferred tax assets and U.S. deferred tax liabilities, primarily related to net operating loss carry forwards in the foreign jurisdictions that the Company believes will not be utilized during the carryforward period. There were no other valuation allowances at September 30, 2017 due to anticipated utilization of all the deferred tax assets as the Company believes it will have sufficient taxable income to utilize these assets.
During fiscal 2016, the Company recorded net additional valuation reserves of $67,000 related to tax carryforwards in foreign jurisdictions that the Company believes will not be utilized during the carryforward period. During fiscal 2015, the Company recorded net additional valuation reserves of $54,000 due to the expiration of capital loss carryforwards. In addition, the Company reversed offsetting amounts of valuation reserves for foreign deferred tax assets and U.S. deferred tax liabilities related to the utilization of net operating loss carryforwards in Europe in fiscal 2016 and 2017. As these were offsetting amounts, these changes had no effect on net earnings.
Income tax expense is computed at rates different than statutory rates. The reconciliation between effective and statutory rates is as follows:
|
| | | | | | | | | |
| | Year Ended September 30, |
| | 2017 | | 2016 | | 2015 |
Statutory rates | | 34.0 | % | | (34.0 | )% | | (34.0 | )% |
Increase (reduction) in income taxes resulting from: | | | | | | |
Domestic production deduction | | (0.7 | )% | | — | % | | — | % |
Research and development credit | | (2.9 | )% | | (14.9 | )% | | (0.1 | )% |
Changes in tax law, R&D credit | | — | % | | (9.2 | )% | | (3.8 | )% |
State income taxes, net of federal benefit | | 1.4 | % | | 2.1 | % | | (1.1 | )% |
Differences in foreign effective tax rates |
| 1.5 | % |
| 4.8 | % |
| 1.3 | % |
Valuation reserve | | — | % | | 5.8 | % | | — | % |
Meals and entertainment deduction limitation | | 1.1 | % | | 5.5 | % | | 0.7 | % |
Other permanent differences | | 0.2 | % | | 0.3 | % | | (0.1 | )% |
Income tax combined effective rate | | 34.6 | % | | (39.6 | )% | | (37.1 | )% |
In fiscal 2016, income tax expense was reduced by approximately $106,000 for additional research and development tax credits related to expenditures incurred in fiscal 2015 due to the permanent renewal of the tax credit retroactive to January 1, 2015. In fiscal 2015, the existing research and development tax credit was retroactively renewed for a one-year period beginning on January 1, 2014. Due to this change in tax law, the Company recorded approximately $305,000 of additional research and development credits in fiscal 2015 related to research and development expenditures incurred during fiscal 2014.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
|
| | | |
Balance at October 1, 2016 | $ | 95 |
|
Additions based on tax positions related to the current period | 7 |
|
Reductions for tax positions of prior periods | (16 | ) |
Balance at September 30, 2017 | $ | 86 |
|
As of September 30, 2017, the amount of unrecognized tax benefits, which if recognized would favorably affect the Company’s effective tax rate, is $86,000.
The Company is subject to income taxes in the U.S. federal jurisdiction and various state 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. The Company is generally no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for the years before 2012.
The Company is not currently under examination by any U.S. federal or state jurisdictions. There are examinations in foreign jurisdictions for which there are no expected material changes in the unrecognized tax benefit liability within the next twelve months. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax positions, the Company believes its recorded liabilities for income taxes represent the most probable outcome. The Company adjusts these liabilities in light of changing facts and circumstances.
The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in other income and expense for all periods presented. As of September 30, 2017 and 2016, the Company had accrued $30,000 and $32,000, respectively, for possible interest and penalties.