| (12) | INCOME TAXES |
Earnings before income taxes were as follows:
| 2017 | 2016 | 2015 | ||||||||||
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U.S. |
$ | 65,113 | $ | 55,764 | $ | 57,958 | ||||||
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Foreign |
23,100 | 11,046 | 12,914 | |||||||||
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Total |
$ | 88,213 | $ | 66,810 | $ | 70,872 | ||||||
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The provision (benefit) for income taxes as of March 31 includes the following components:
| 2017 | 2016 | 2015 | ||||||||||
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Current: |
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Federal |
$ | 16,889 | $ | 11,492 | $ | 10,923 | ||||||
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State and local |
2,498 | 1,103 | 1,421 | |||||||||
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Foreign |
9,298 | 4,268 | 6,289 | |||||||||
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Total Current |
28,685 | 16,863 | 18,633 | |||||||||
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Deferred: |
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Federal |
987 | 5,360 | 6,880 | |||||||||
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State and local |
(147 | ) | 437 | 1,025 | ||||||||
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Foreign |
(2,677 | ) | (3,679 | ) | (1,382 | ) | ||||||
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Total Deferred |
(1,837 | ) | 2,118 | 6,523 | ||||||||
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Total |
$ | 26,848 | $ | 18,981 | $ | 25,156 | ||||||
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The following is a reconciliation between the U.S. statutory federal income tax rate and the effective tax rate:
| 2017 | 2016 | 2015 | ||||||||||
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U.S. federal statutory rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
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State and local income taxes, net of federal income tax benefit |
1.7 | % | 2.1 | % | 2.9 | % | ||||||
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Section 199 deduction |
(1.8 | )% | (1.5 | )% | (1.2 | )% | ||||||
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International rate differential |
(3.3 | )% | (2.6 | )% | (1.2 | )% | ||||||
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Unrecognized tax benefits |
(0.9 | )% | (1.6 | )% | 0.4 | % | ||||||
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Foreign permanent differences |
(2.1 | )% | (2.0 | )% | (2.1 | )% | ||||||
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Non-deductible transaction costs |
0.2 | % | 1.5 | % | 0.3 | % | ||||||
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Valuation allowances |
1.2 | % | (2.2 | )% | 0.8 | % | ||||||
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Goodwill impairment |
— | — | 0.3 | % | ||||||||
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Other |
0.4 | % | (0.3 | )% | 0.3 | % | ||||||
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Effective tax rate |
30.4 | % | 28.4 | % | 35.5 | % | ||||||
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The net deferred tax components as of March 31 consisted of the following:
| 2017 | 2016 | |||||||
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Deferred tax liabilities: |
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Book basis over tax basis of fixed assets |
$ | (28,911 | ) | $ | (26,075 | ) | ||
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Book basis over tax basis of intangible assets |
(45,044 | ) | (45,671 | ) | ||||
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Lease obligations |
— | (948 | ) | |||||
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Deferred financing costs |
(434 | ) | (628 | ) | ||||
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Other |
(185 | ) | (228 | ) | ||||
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Total deferred tax liabilities |
(74,574 | ) | (73,550 | ) | ||||
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Deferred tax assets: |
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Inventory reserves |
1,632 | 1,822 | ||||||
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Inventory capitalization |
595 | 282 | ||||||
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Allowance for doubtful accounts |
332 | 391 | ||||||
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Stock based compensation expense |
1,535 | 1,339 | ||||||
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Minimum pension liability |
642 | 637 | ||||||
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Loss carry forward amounts |
5,215 | 5,947 | ||||||
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Credit carry forward amounts |
378 | 331 | ||||||
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Interest rate swaps |
— | 126 | ||||||
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State basis over tax basis of fixed assets |
565 | 552 | ||||||
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Non-deductible accruals and other |
5,037 | 4,033 | ||||||
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Deferred compensation |
206 | 104 | ||||||
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Lease obligations |
384 | — | ||||||
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Gross deferred tax asset |
16,521 | 15,564 | ||||||
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Valuation allowance |
(4,860 | ) | (4,494 | ) | ||||
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Net deferred tax asset |
11,661 | 11,070 | ||||||
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Net deferred tax liability |
$ | (62,913 | ) | $ | (62,480 | ) | ||
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As of March 31, 2017, Multi-Color had tax-effected state and foreign operating loss carryforwards of $727 and $4,488, respectively. As of March 31, 2016, Multi-Color had tax-effected state and foreign operating loss carryforwards of $875 and $5,072, respectively. There were no federal operating loss carryforwards as of March 31, 2017 and 2016. The state operating loss carryforwards will expire between fiscal 2026 and fiscal 2031. The foreign operating loss carryforwards include $1,577 with no expiration date; the remainder will expire between fiscal 2019 and fiscal 2033. The state operating loss carryforwards include losses of $727 that were acquired in connection with business combinations. Utilization of the acquired state tax loss carryforwards may be limited pursuant to Section 382 of the Internal Revenue Code of 1986.
As of March 31, 2017 and 2016, Multi-Color had valuation allowances of $4,860 and $4,494, respectively. As of March 31, 2017 and 2016, $4,752 and $4,366, respectively, of the valuation allowances related to certain deferred tax assets in foreign jurisdictions due to the uncertainty of the realization of future tax benefits from those assets.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities and projected future taxable income in making this assessment. At each reporting date, the Company considers both negative and positive evidence that impacts the assessment of the realization of deferred tax assets.
The benefits of tax positions are not recorded unless it is more likely than not the tax position would be sustained upon challenge by the appropriate tax authorities. Tax benefits that are more likely than not to be sustained are measured at the largest amount of benefit that is cumulatively greater than a 50% likelihood of being realized.
As of March 31, 2017 and 2016, the Company had liabilities of $5,665 and $6,253, respectively, recorded for unrecognized tax benefits for U.S. federal, state and foreign tax jurisdictions. During the years ended March 31, 2017 and 2016, the Company recognized $175 and $(118), respectively, of interest and penalties in income tax expense in the consolidated statements of income. The liability for the gross amount of interest and penalties at March 31, 2017 and 2016 was $1,892 and $1,806, respectively. The liability for unrecognized tax benefits is classified in other noncurrent liabilities on the consolidated balance sheets for the portion of the liability where payment of cash is not anticipated within one year of the balance sheet date. During the year ended March 31, 2017, the Company released $1,381 of reserves, including interest and penalties, related to uncertain tax positions for which the statutes of limitations have lapsed or there was a reduction in the tax position related to a prior year. The Company believes that it is reasonably possible that $1,759 of unrecognized tax benefits as of March 31, 2017 could be released within the next 12 months due to lapse of statute of limitations and settlements of certain foreign and domestic income tax matters. The unrecognized tax benefits that, if recognized, would favorably impact the effective tax rate are $5,075.
A summary of the activity for the Company’s unrecognized tax benefits as of March 31 is as follows:
| 2017 | 2016 | |||||||
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Beginning balance |
$ | 6,253 | $ | 4,045 | ||||
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Additions based on tax positions related to the current year |
196 | 318 | ||||||
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Additions of tax positions of prior years |
684 | 3,515 | ||||||
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Reductions of tax positions of prior years |
(7 | ) | (166 | ) | ||||
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Lapse of applicable statutes of limitations |
(1,091 | ) | (1,280 | ) | ||||
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Currency translation |
(370 | ) | (179 | ) | ||||
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Ending balance |
$ | 5,665 | $ | 6,253 | ||||
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The Company files income tax returns in the U.S. federal jurisdiction, various foreign jurisdictions and various state and local jurisdictions where the statutes of limitations generally range from three to five years. At March 31, 2017, the Company is no longer subject to U.S. federal examinations by tax authorities for years before fiscal 2014. The Company is no longer subject to state and local examinations by tax authorities for years before fiscal 2012. In foreign jurisdictions, the Company is no longer subject to examinations by tax authorities for years before fiscal 1999.
The Company did not provide for U.S. federal income taxes or foreign withholding taxes in fiscal 2017 on approximately $54,882 of undistributed earnings of its foreign subsidiaries as such earnings are intended to be reinvested indefinitely. Quantification of the deferred tax liability, if any, associated with these undistributed earnings is not practicable. The Company may periodically repatriate a portion of these earnings to the extent we can do so essentially tax-free or at minimal tax cost.