| (5) | Income Taxes |
| (a) | Earnings before income taxes, and the related provision for income taxes for the years ended September 30, 2017, 2016 and 2015 were as follows: |
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Year Ended September 30, |
2017 | 2016 | 2015 | |||||||||
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Domestic |
$ | 31,885 | $ | 44,795 | $ | 50,653 | ||||||
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Foreign |
4,544 | 5,849 | 4,410 | |||||||||
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Total earnings before income taxes |
$ | 36,429 | $ | 50,644 | $ | 55,063 | ||||||
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Provision (credit) for income taxes - |
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Federal - |
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Current |
$ | 11,262 | $ | 16,178 | $ | 16,152 | ||||||
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Temporary differences |
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Fixed asset basis differences and depreciation |
(181 | ) | (45 | ) | 50 | |||||||
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Intangible asset basis differences and amortization |
(1,158 | ) | (744 | ) | (421 | ) | ||||||
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Currently non-deductible expenses and reserves |
884 | (694 | ) | 217 | ||||||||
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Stock-based compensation |
(635 | ) | 129 | 126 | ||||||||
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Net operating loss carryforwards utilized |
1,831 | — | — | |||||||||
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Tax credit carryforwards utilized |
67 | 41 | 250 | |||||||||
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Other, net |
99 | 181 | 19 | |||||||||
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Subtotal |
12,169 | 15,046 | 16,393 | |||||||||
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State and local |
1,900 | 2,421 | 2,236 | |||||||||
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Foreign |
803 | 948 | 894 | |||||||||
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Total income tax provision |
$ | 14,872 | $ | 18,415 | $ | 19,523 | ||||||
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| (b) | The following is a reconciliation between the statutory U.S. income tax rate and the effective rate derived by dividing the provision for income taxes by earnings before income taxes: |
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Year Ended September 30, |
2017 | 2016 | 2015 | |||||||||||||||||||||
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Computed income taxes at statutory rate |
$ | 12,750 | 35.0 | % | $ | 17,719 | 35.0 | % | $ | 19,264 | 35.0 | % | ||||||||||||
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Increase (decrease) in taxes resulting from - |
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State and local income taxes |
1,093 | 3.0 | 1,329 | 2.6 | 1,365 | 2.5 | ||||||||||||||||||
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Foreign tax rate differences |
(281 | ) | (0.8 | ) | (337 | ) | (0.7 | ) | (217 | ) | (0.4 | ) | ||||||||||||
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Qualified domestic production incentives |
(1,012 | ) | (2.8 | ) | (1,290 | ) | (2.5 | ) | (1,197 | ) | (2.2 | ) | ||||||||||||
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Acquisition-related costs |
— | — | 215 | 0.4 | — | — | ||||||||||||||||||
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Uncertain tax position activity |
134 | 0.4 | 122 | 0.2 | (25 | ) | — | |||||||||||||||||
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Goodwill impairment charge |
2,320 | 6.4 | — | — | — | — | ||||||||||||||||||
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Valuation allowance |
— | — | 327 | 0.7 | 7 | — | ||||||||||||||||||
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Other, net |
(132 | ) | (0.4 | ) | 330 | 0.7 | 326 | 0.6 | ||||||||||||||||
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| $ | 14,872 | 40.8 | % | $ | 18,415 | 36.4 | % | $ | 19,523 | 35.5 | % | |||||||||||||
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| (c) | The components of net deferred tax liabilities were as follows: |
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As of September 30, |
2017 | 2016 | ||||||
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Deferred tax assets - |
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Valuation reserves and non-deductible expenses |
$ | 1,762 | $ | 2,366 | ||||
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Stock compensation expense not deductible |
3,367 | 3,110 | ||||||
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Net operating loss and tax credit carryforwards |
743 | 2,190 | ||||||
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Basis difference in equity-method investee |
302 | 302 | ||||||
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Inventory basis differences |
1,269 | 1,620 | ||||||
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Other |
(289 | ) | 297 | |||||
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Subtotal |
7,154 | 9,885 | ||||||
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Less valuation allowance |
(342 | ) | (342 | ) | ||||
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Deferred tax assets |
6,812 | 9,543 | ||||||
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Deferred tax liabilities - |
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Fixed asset basis differences and depreciation |
(1,325 | ) | (1,526 | ) | ||||
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Intangible asset basis differences and amortization |
(9,784 | ) | (10,770 | ) | ||||
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Deferred tax liabilities |
(11,109 | ) | (12,296 | ) | ||||
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Net deferred tax liabilities |
$ | (4,297 | ) | $ | (2,753 | ) | ||
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For income tax purposes, we have recorded deferred tax assets related to operating loss and tax credit carryforwards in both U.S. and foreign jurisdictions totaling $546 and $197, respectively, as of September 30, 2017. At September 30, 2016, such deferred tax assets totaled $1,945 and $245, respectively. The operating loss carryforwards in foreign jurisdictions have no expiration date. The operating loss carryforwards in the U.S. expire between 2023 and 2036 at the federal level, and between 2028 and 2036 at the state level. The aggregate amount of federal, state and foreign operating loss carryforwards total $552, $2,731 and $697, respectively, at September 30, 2017, and the AMT tax credit carryforward totals $133. The use of the federal and state losses and credits is limited by the change of ownership provisions of the Internal Revenue Code.
The realization of deferred tax assets is dependent upon the generation of future taxable income in the applicable jurisdictions. We have considered the levels of currently anticipated pre-tax income in U.S. and foreign jurisdictions in assessing the required level of the deferred tax asset valuation allowance including the characterization of the income as ordinary or capital. Taking into consideration historical and current operating results, and other factors, we believe that it is more likely than not that the net deferred tax asset of $6,812 will be realized. The amount of the net deferred tax asset considered realizable, however, could be reduced in future years if estimates of future taxable income are reduced.
Undistributed earnings reinvested indefinitely in our non-U.S. operations were approximately $12,500 and $10,000 at September 30, 2017 and September 30, 2016, respectively. U.S. deferred tax liabilities of approximately $2,500 and $2,000 on such earnings, after consideration of foreign tax credits, have not been recorded as of September 30, 2017 and September 30, 2016, respectively.
As described in Note 1, we utilize a comprehensive model for the recognition, measurement, presentation and disclosure of uncertain tax positions, assuming full knowledge of all relevant facts by the applicable tax authorities. The total amount of unrecognized tax benefits at September 30, 2017 and September 30, 2016 related to such positions was $517 and $502, respectively, of which $405 would favorably affect the effective tax rate if recognized. We generally recognize interest and penalties related to uncertain tax positions as a component of our income tax provision. During fiscal 2017, such penalties and interest totaled $35. During fiscal 2016, we increased our tax provision by approximately $8 for such penalties and interest, and recorded approximately $85 to the opening balance sheet of Magellan. We had approximately $165 accrued for the payment of interest and penalties at September 30, 2017 compared to $130 accrued at September 30, 2016. The amount of our liability for uncertain tax positions expected to be paid or settled in the next 12 months is uncertain.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
| 2017 | 2016 | |||||||
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Unrecognized income tax benefits beginning of year |
$ | 502 | $ | 238 | ||||
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Additions for tax positions of prior years |
144 | 264 | ||||||
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Tax examination and other settlements |
(129 | ) | — | |||||
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Unrecognized income tax benefits at end of year |
$ | 517 | $ | 502 | ||||
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We are subject to examination by the tax authorities in the U.S. (both federal and state) and the countries of Australia, Belgium, China, England, France, Germany, Holland, Italy and Singapore. In the U.S., open tax years are fiscal 2014, fiscal 2015 and fiscal 2016. In countries outside the U.S., open tax years generally range from fiscal 2012 and forward. However, in Australia, Belgium and Singapore, the utilization of local net operating loss carryforwards extends the statute of limitations for examination well into the foreseeable future. To the extent that adjustments result from the completion of these examinations or the lapsing of statutes of limitation, they will affect tax liabilities in the period known. We believe that the results of any tax authority examinations would not have a significant adverse impact on our financial condition or results of operations