Entity information:

Note 12—Income Taxes

The components of income before income taxes are as follows:

 

     January 31  
     2017      2016      2015  
(In thousands)                     

Domestic

    $ 4,026      $ 5,982      $ 5,401  

Foreign

      2,579        927        1,531  
  

 

 

     

 

 

     

 

 

  
   $ 6,605      $ 6,909      $ 6,932  
  

 

 

     

 

 

     

 

 

  

The components of the provision for income taxes are as follows:

 

     January 31  
     2017     2016     2015  
(In thousands)                   

Current:

       

Federal

    $ 1,269     $ 1,930     $ 1,666  

State

      209       470       466  

Foreign

      725       276       535  
  

 

 

    

 

 

    

 

 

  
     2,203       2,676       2,667  
  

 

 

    

 

 

    

 

 

  

Deferred:

       

Federal

    $ 150     $ (402 )    $ (290 ) 

State

      37       126       (107 ) 

Foreign

      (13 )      (16 )      —  
  

 

 

    

 

 

    

 

 

  
     174       (292 )      (397 ) 
  

 

 

    

 

 

    

 

 

  
   $ 2,377     $ 2,384     $ 2,270  
  

 

 

    

 

 

    

 

 

  

The Company’s effective tax rate for 2017 was 36.0% compared to 34.5% in 2016 and 32.7% in 2015. The increase from 2016 is primarily related to non-deductible transaction costs and increased unrecognized tax benefits. The increase in 2016 from 2015 is primarily related to the change in valuation allowance. The provision for income taxes differs from the amount computed by applying the United States federal statutory income tax rate of 34% to income before income taxes. The reasons for this difference were due to the following:

 

     January 31  
     2017     2016     2015  
(In thousands)                   

Income Tax Provision at Statutory Rate

    $ 2,246     $ 2,349     $ 2,357  

Capitalized Transaction Costs

      179       —         —    

Unrecognized Tax Benefits

      165       (67 )      23  

State Taxes, Net of Federal Tax Effect

      162       277       233  

Domestic Production Deduction

      (103 )      (134 )      (164 ) 

R&D Credits

      (168 )      (176 )      (135 ) 

Other

      (104 )      135       (44 ) 
  

 

 

    

 

 

    

 

 

  
   $ 2,377     $ 2,384     $ 2,270  
  

 

 

    

 

 

    

 

 

  

 

The components of deferred income tax expense arise from various temporary differences and relate to items included in the statement of income. The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities are as follows:

 

    

January 31

  
     2017     2016  
(In thousands)             

Deferred Tax Assets:

     

Inventory

    $ 2,151     $ 1,948  

State R&D Credits

      679       583  

Share-Based Compensation

      546       830  

Foreign Tax Credit

      508       426  

Compensation Accrual

      281       346  

Unrecognized State Tax Benefits

      241       237  

Warranty Reserve

      192       149  

Deferred Service Contract Revenue

      176       200  

Other

      348       383  
  

 

 

    

 

 

  
     5,122       5,102  

Deferred Tax Liabilities:

     

Accumulated Tax Depreciation in Excess of Book Depreciation

      1,380       1,355  

Other

      263       193  
  

 

 

    

 

 

  
     1,643       1,548  
  

 

 

    

 

 

  

Subtotal

      3,479       3,554  

Valuation Allowance

      (679 )      (583 ) 
  

 

 

    

 

 

  

Net Deferred Tax Assets

    $ 2,800     $ 2,971  
  

 

 

    

 

 

  

As of January 31, 2017 there are $0.5 million of foreign tax credit carryforwards which are expected to be utilized prior to their expiration. Carryforwards will expire during fiscal years 2024 to 2027.

The valuation allowance of $0.7 million at January 31, 2017 and $0.6 million at January 31, 2016 related to state research and development tax credit carryforwards which are expected to expire unused. The valuation allowance increased $0.1 million in 2017 and $0.3 million in 2016 due to the generation of research and development credits in excess of the Company’s ability to currently utilize credits, and the decision to fully reserve for the state tax benefits of all R&D tax credit carryforwards, net of federal benefit. The Company has reached this conclusion after considering the availability of taxable income in prior carryback years, tax planning strategies, and the likelihood of future taxable income exclusive of reversing temporary differences and carryforwards in the relevant state jurisdiction.

The Company believes that it is reasonably possible that some unrecognized tax benefits, accrued interest and penalties could decrease income tax expense in the next year due to either the review of previously filed tax returns or the expiration of certain statutes of limitation. The changes in the balances of unrecognized tax benefits, excluding interest and penalties are as follows:

 

     2017     2016     2015  
(In thousands)                   

Balance at February 1

    $ 591     $ 707     $ 715  

Increases in prior period tax positions

      75       —       —  

Increases in current period tax positions

      133       49       87  

Reductions related to lapse of statute of limitations

      (91 )      (165 )      (95 ) 
  

 

 

    

 

 

    

 

 

  

Balance at January 31

    $ 708     $ 591     $ 707  
  

 

 

    

 

 

    

 

 

  

 

If the $0.7 million balance as of January 31, 2017 is recognized, $0.5 million would decrease the effective tax rate in the period in which each of the benefits is recognized and the remainder would be offset by a reversal of deferred tax assets.

During fiscal 2017, 2016 and 2015, the Company recognized an expense of $52,000, a benefit of $87,000 and an expense of $43,000, respectively, related to change in interest and penalties, which are included as a component of income tax expense in the accompanying statements of income. The Company has accrued potential interest and penalties of $0.4 million at the end of both January 31, 2017 and 2016.

The Company and its subsidiaries file income tax returns in U.S. federal jurisdictions, various state jurisdictions, and various foreign jurisdictions. The Company is no longer subject to U.S. federal tax examinations for fiscal years ended prior to January 2014.

U.S. income taxes have not been provided on $4.7 million of undistributed earnings of the Company’s German subsidiary since it is the Company’s intention to permanently reinvest such earnings offshore or to repatriate them only when it is tax efficient to do so. It is impracticable to estimate a total tax liability or benefit, if any, created by the future distribution of all or portions of these earnings due to complexities related to taxation and foreign tax credit benefits. If circumstances change and it becomes apparent that some, or all of these undistributed earnings as of January 31, 2017 will not be indefinitely reinvested, the provision for the tax consequence, if any, will be recorded in the period when circumstances change.