6. INCOME TAXES
The Company is subject to United States federal, state and foreign taxes on its operations. The geographical sources of income before income taxes for each of the three years ended July 31 are as follows (in thousands):
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
United States |
|
$ |
27,642 |
|
|
$ |
28,820 |
|
|
$ |
20,442 |
|
|
Foreign |
|
|
4,800 |
|
|
|
(590 |
) |
|
|
(1,558 |
) |
|
Income before income taxes |
|
$ |
32,442 |
|
|
$ |
28,230 |
|
|
$ |
18,884 |
|
The components of income tax expense/(benefit) for the years ended July 31 consisted of the following (in thousands):
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
7,620 |
|
|
$ |
7,900 |
|
|
$ |
9,176 |
|
|
Foreign |
|
|
511 |
|
|
|
166 |
|
|
|
(127 |
) |
|
State |
|
|
1,588 |
|
|
|
1,275 |
|
|
|
1,214 |
|
|
|
|
|
9,719 |
|
|
|
9,341 |
|
|
|
10,263 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(1,052 |
) |
|
|
358 |
|
|
|
(3,660 |
) |
|
Foreign |
|
|
160 |
|
|
|
(261 |
) |
|
|
293 |
|
|
State |
|
|
(18 |
) |
|
|
117 |
|
|
|
(150 |
) |
|
|
|
|
(910 |
) |
|
|
214 |
|
|
|
(3,517 |
) |
|
Total |
|
$ |
8,809 |
|
|
$ |
9,555 |
|
|
$ |
6,746 |
|
Deferred income taxes are provided on all temporary differences between financial and taxable income. The following table presents the components of the Company’s deferred tax assets and liabilities at July 31, 2017 and 2016 (in thousands):
|
|
|
2017 |
|
|
2016 |
|
||
|
Non-current deferred tax assets |
|
|
|
|
|
|
|
|
|
Inventory |
|
$ |
933 |
|
|
$ |
571 |
|
|
Net operating loss |
|
|
1,233 |
|
|
|
2,061 |
|
|
Employee benefits |
|
|
2,322 |
|
|
|
2,059 |
|
|
Deferred compensation |
|
|
3,922 |
|
|
|
3,171 |
|
|
Accrued liabilities |
|
|
43 |
|
|
|
498 |
|
|
Other |
|
|
982 |
|
|
|
1,062 |
|
|
Less valuation allowance |
|
|
(1,768 |
) |
|
|
(2,895 |
) |
|
Total non-current deferred tax assets |
|
$ |
7,667 |
|
|
$ |
6,527 |
|
|
Non-current deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
Difference in amortization basis of intangibles |
|
$ |
(34,851 |
) |
|
$ |
(11,115 |
) |
|
Difference in depreciable basis of property |
|
|
(6,722 |
) |
|
|
(4,928 |
) |
|
Other |
|
|
(767 |
) |
|
|
(432 |
) |
|
Total non-current deferred tax liabilities |
|
|
(42,340 |
) |
|
|
(16,475 |
) |
|
Net non-current deferred tax liability |
|
$ |
(34,673 |
) |
|
$ |
(9,948 |
) |
As of July 31, 2017, the Company had $3.0 million of foreign net operating loss carryforwards that do not expire, and $1.0 million of U.S. federal net operating loss carryforward that expires in 2034.
The Company records provisions for uncertain tax provisions in accordance with GAAP, which prescribes the minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. The statute of limitations remains open for the fiscal year ended July 31, 2014 and forward for United States federal income taxes and fiscal year ended July 31, 2012 and forward for state tax jurisdictions.
In fiscal year 2017, the Company’s subsidiary in Italy was successful in its appeal of a case related to income tax assessments for the three year period ended July 31, 2011, and settled litigation with the local taxing authority related to the registration tax assessment for the December 2007 purchase of the electronic chemicals business in Italy. During fiscal year 2017, the Company reversed its liability for its uncertain tax position in Italy as of July 31, 2016 of $0.1 million.
The Company does not intend to permanently reinvest its unremitted foreign earnings associated with its Mexico operations outside the United States. Except for Mexico, the Company maintains its foreign earnings from the remaining foreign subsidiaries to be permanently reinvested.
For the year ended July 31, 2017, stock-based compensation excess tax benefits of $1.0 million were reflected in the consolidated statements of income as a component of the provision for income taxes as a result of the early adoption of ASU 2016‑09. See note 1 for more details regarding the adoption of ASU 2016-09.
The following table accounts for the differences between the actual tax provision, and the amounts obtained by applying the applicable statutory United States federal income tax rate of 35% to income from continuing operations before income taxes for each of the years ended July 31, 2017, 2016, and 2015, respectively (in thousands):
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Income taxes at the federal statutory rate |
|
$ |
11,354 |
|
|
$ |
9,881 |
|
|
$ |
6,610 |
|
|
Effect of foreign operations |
|
|
(198 |
) |
|
|
485 |
|
|
|
182 |
|
|
Change in valuation allowance |
|
|
(1,218 |
) |
|
|
311 |
|
|
|
648 |
|
|
Adjustments to foreign operations |
|
|
— |
|
|
|
— |
|
|
|
1,148 |
|
|
Effects of foreign currency fluctuations |
|
|
131 |
|
|
|
(330 |
) |
|
|
(953 |
) |
|
State income taxes, net of federal income tax effect |
|
|
1,015 |
|
|
|
969 |
|
|
|
639 |
|
|
Production deduction and tax credits |
|
|
(1,217 |
) |
|
|
(1,473 |
) |
|
|
(1,182 |
) |
|
Stock-based compensation |
|
|
(964 |
) |
|
|
— |
|
|
|
— |
|
|
Acquisition related cost |
|
|
151 |
|
|
|
85 |
|
|
|
125 |
|
|
Flowchem reorganization |
|
|
(584 |
) |
|
|
— |
|
|
|
— |
|
|
Other |
|
|
339 |
|
|
|
(373 |
) |
|
|
(471 |
) |
|
Total |
|
$ |
8,809 |
|
|
$ |
9,555 |
|
|
$ |
6,746 |
|
The Company’s effective tax rate decreased in fiscal year 2017 primarily due to $1.0 million of stock-based compensation excess tax benefits, a change in valuation allowance of $1.2 million in Singapore and Italy, a $0.9 million tax benefit from a U.S. domestic manufacturing deduction and a deferred tax benefit of $0.6 million realized as a result of the reorganization of the legal structure of the entities acquired in the Flowchem acquisition. The change of valuation allowance in Singapore and Italy is due to the Company’s profitable operations in Singapore and Italy in fiscal year 2017.
Uncertain Tax Positions
The Company is subject to income taxes in the U.S. (federal and state) and numerous foreign jurisdictions. Significant judgment is required in evaluating the Company’s tax positions and determining its provision for income taxes. There are transactions and calculations for which the ultimate tax determination is uncertain. The Company establishes reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due or may be challenged despite our belief that our tax return positions are supportable. The Company accounts for uncertain tax positions in accordance with FASB ASC 740, which prescribes the minimum recognition threshold a tax position taken or expected to be taken in a tax return is required to meet before being recognized in the financial statements.
The following table summarizes the activity related to our gross unrecognized tax benefits (in thousands):
|
Balance at July 31, 2016 |
|
$ |
1,254 |
|
|
Increases related to prior years positions |
|
|
129 |
|
|
Decreases related to prior year positions |
|
|
(320 |
) |
|
Settlements |
|
|
(98 |
) |
|
Balance at July 31, 2017 |
|
$ |
965 |
|
The Company does not anticipate any significant changes to the unrecognized tax benefits within the next twelve months. The Company recognizes interest and penalties related to uncertain tax positions within the provision for income taxes in the consolidated statements of income. The Company recognized $0.1 million in penalties and interest related to unrecognized tax benefits for the years ended July 31, 2017 and 2016.