Note 17. Income Taxes
Income/(loss) before provision for income taxes is taxed in the following jurisdictions (in thousands):
|
|
|
Fiscal Year Ended |
|
|||||||||
|
|
|
October 31, 2017 |
|
|
October 29, 2016 |
|
|
October 31, 2015 |
|
|||
|
Domestic |
|
$ |
54,672 |
|
|
$ |
43,243 |
|
|
$ |
34,812 |
|
|
Foreign |
|
|
(4,651 |
) |
|
|
— |
|
|
|
— |
|
|
Income before provision for income taxes |
|
$ |
50,021 |
|
|
$ |
43,243 |
|
|
$ |
34,812 |
|
Provision for income taxes is summarized as follows (in thousands):
|
|
|
Fiscal Year Ended |
|
|||||||||
|
|
|
October 31, 2017 |
|
|
October 29, 2016 |
|
|
October 31, 2015 |
|
|||
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
12,101 |
|
|
$ |
12,564 |
|
|
$ |
13,970 |
|
|
State |
|
|
3,662 |
|
|
|
4,147 |
|
|
|
3,290 |
|
|
Foreign |
|
|
3 |
|
|
|
— |
|
|
|
— |
|
|
Total Current |
|
$ |
15,766 |
|
|
$ |
16,711 |
|
|
$ |
17,260 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
4,586 |
|
|
|
(2,250 |
) |
|
|
(4,749 |
) |
|
State |
|
|
(133 |
) |
|
|
(1,411 |
) |
|
|
(576 |
) |
|
Foreign |
|
|
(1,569 |
) |
|
|
— |
|
|
|
— |
|
|
Total Deferred |
|
|
2,884 |
|
|
|
(3,661 |
) |
|
|
(5,325 |
) |
|
Provision for income taxes |
|
$ |
18,650 |
|
|
$ |
13,050 |
|
|
$ |
11,935 |
|
Income tax expense at the federal statutory rate is reconciled to the Company’s provision for income taxes as follows (in thousands):
|
|
|
Fiscal Year Ended |
|
|||||||||
|
|
|
October 31, 2017 |
|
|
October 29, 2016 |
|
|
October 31, 2015 |
|
|||
|
Income tax expense at federal statutory rate |
|
$ |
17,507 |
|
|
$ |
15,135 |
|
|
$ |
12,184 |
|
|
Taxes on foreign income which differ from the U.S. statutory rate |
|
|
58 |
|
|
|
— |
|
|
|
— |
|
|
State expense |
|
|
2,247 |
|
|
|
1,590 |
|
|
|
1,558 |
|
|
Deferred tax adjustments |
|
|
— |
|
|
|
(1,531 |
) |
|
|
— |
|
|
Manufacturing and research incentives |
|
|
(2,234 |
) |
|
|
(2,592 |
) |
|
|
(1,475 |
) |
|
Nondeductible items |
|
|
915 |
|
|
|
988 |
|
|
|
219 |
|
|
Other items |
|
|
157 |
|
|
|
(540 |
) |
|
|
(551 |
) |
|
Provision for income taxes |
|
$ |
18,650 |
|
|
$ |
13,050 |
|
|
$ |
11,935 |
|
Tax expense for fiscal year 2017 was favorably impacted by incentives for U.S. manufacturing and research and unfavorably impacted by nondeductible transaction costs related to business acquisitions and expenses related to the Company’s secondary stock offering.
Tax expense for fiscal year 2016 was favorably impacted by incentives for U.S. manufacturing and research as well as adjustments to deferred income tax balances. The deferred income tax balance adjustments were not material to current or previously issued financial statements.
Tax expense for fiscal year 2015 was favorably impacted by incentives for U.S. manufacturing and research.
No items included in Other items in the income tax reconciliation above are individually, or when appropriately aggregated, significant.
Temporary differences and carryforwards that give rise to deferred tax assets and liabilities include the following items (in thousands):
|
|
|
Fiscal Year Ended |
|
|||||
|
|
|
October 31, 2017 |
|
|
October 29, 2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Product warranty |
|
$ |
15,817 |
|
|
$ |
14,201 |
|
|
Inventory |
|
|
7,684 |
|
|
|
5,891 |
|
|
Deferred employee benefits |
|
|
13,821 |
|
|
|
9,096 |
|
|
Net operating loss and credit carryforwards |
|
|
6,208 |
|
|
|
2,114 |
|
|
Other reserves and allowances |
|
|
3,426 |
|
|
|
5,311 |
|
|
Gross deferred tax assets |
|
|
46,956 |
|
|
|
36,613 |
|
|
Less valuation allowance |
|
|
(166 |
) |
|
|
(154 |
) |
|
Deferred tax assets |
|
|
46,790 |
|
|
|
36,459 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
Intangible assets |
|
|
(45,866 |
) |
|
|
(40,817 |
) |
|
Property, plant and equipment |
|
|
(20,635 |
) |
|
|
(12,661 |
) |
|
Other |
|
|
(1,281 |
) |
|
|
(430 |
) |
|
Deferred tax liabilities |
|
|
(67,782 |
) |
|
|
(53,908 |
) |
|
Net deferred tax liability |
|
$ |
(20,992 |
) |
|
$ |
(17,449 |
) |
The net deferred tax assets/ (liabilities) recorded in the consolidated balance sheet are as follows (in thousands):
|
|
|
Fiscal Year Ended |
|
|||||
|
|
|
October 31, 2017 |
|
|
October 29, 2016 |
|
||
|
Noncurrent deferred tax asset |
|
$ |
1,535 |
|
|
$ |
— |
|
|
Noncurrent deferred tax liability |
|
|
(22,527 |
) |
|
|
(17,449 |
) |
|
Net deferred tax liability |
|
$ |
(20,992 |
) |
|
$ |
(17,449 |
) |
As of each balance sheet date, management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. The Company will continue to evaluate its valuation allowance requirements in light of changing facts and circumstances, and may adjust its deferred tax valuation allowances accordingly. It is reasonably possible that the company will either add to, or reverse a portion of its existing deferred tax asset valuation allowance in the future. Such changes in the deferred tax asset valuation allowances could have a material effect on operating results.
At October 31, 2017, the Company has net operating loss carryforwards for U.S. federal income tax purposes of $7.9 million, which are subject to annual limitations and begin to expire in 2029. The Company has state net operating loss carryforwards of $9.9 million, which begin to expire in 2027. The Company also has net operating loss carryforwards generated in Canada of $0.6 million which are offset by a valuation allowance because the loss carryforwards are projected to expire prior to being utilized. In addition, the Company has net operating loss carryforwards of $4.5 million generated in Brazil with no expiration date. The Company has an AMT credit carryforward for federal income tax purposes of $0.3 million.
The Company or one of its subsidiaries files income tax returns in the U.S, Canada, Brazil and various state jurisdictions. With few exceptions, fiscal years 2014, 2015 and 2016 remain open to tax examination by Canadian, U.S. federal and state tax authorities.
The Company regularly assesses the likelihood of an adverse outcome resulting from examinations to determine the adequacy of its tax reserves. As of October 31, 2017, the company believes that it is more likely than not that the tax positions it has taken will be sustained upon the resolution of its audits resulting in no material impact on its consolidated financial position and the results of operations and cash flows. However, the final determination with respect to any tax audits, and any related litigation, could be materially different from the company’s estimates and/or from its historical income tax provisions and accruals and could have a material effect on operating results and/or cash flows in the periods for which that determination is made. In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties, and/or interest assessments.
During fiscal years 2017, 2016 and 2015, the Company recognized in the consolidated statement of income $0.0 million, $0.2 million, and $0.0 million, respectively, for interest and penalties related to uncertain tax liabilities, which the Company recognizes as a part of its provision for income taxes. As of October 31, 2017 and October 29, 2016, the Company has accrued interest and penalties of $0.2 million and $0.2 million, respectively.
A reconciliation of the beginning and ending amount of unrecognized tax benefits are as follows (in thousands):
|
|
|
Fiscal Year Ended |
|
|||||||||
|
|
|
October 31, 2017 |
|
|
October 29, 2016 |
|
|
October 31, 2015 |
|
|||
|
Balance at beginning of year |
|
$ |
2,679 |
|
|
$ |
4,166 |
|
|
$ |
4,612 |
|
|
Additions (reductions) for tax positions in prior year |
|
|
90 |
|
|
|
(1,501 |
) |
|
|
74 |
|
|
Additions for tax positions in current year |
|
|
161 |
|
|
|
192 |
|
|
|
16 |
|
|
Cash settlements with taxing authorities |
|
|
— |
|
|
|
(34 |
) |
|
|
(430 |
) |
|
Statute of limitations |
|
|
(307 |
) |
|
|
(144 |
) |
|
|
(106 |
) |
|
Balance at end of year |
|
$ |
2,623 |
|
|
$ |
2,679 |
|
|
$ |
4,166 |
|
If recognized, $2.9 million, $2.9 million, and $4.2 million of the Company’s unrecognized tax benefits as of October 31, 2017, October 29, 2016, and October 31, 2015, respectively, would affect the Company’s effective income tax rate. A portion of the unrecognized tax benefits relate to state tax issues of acquired companies for which the Company will be indemnified by the seller. As such, an offsetting asset in the amount of $1.1 million is included in other long-term assets.
During the next twelve months, it is reasonably possible that federal and state tax resolutions could reduce unrecognized tax benefits and income tax expense by up to $1.1 million, either because the Company’s tax positions are sustained on audit or settled, or the applicable statute of limitations closes.