10. Income Taxes
The components of income tax expense were as follows for the fiscal years presented:
|
| | | | | | | | | | | |
(in thousands of dollars) | 2017 | | 2016 | | 2015 |
Current tax provision: | | | | | |
Federal | $ | 11,681 |
| | $ | (3,192 | ) | | $ | 12,757 |
|
State | 1,353 |
| | 224 |
| | 311 |
|
Total current tax provision (benefit) | $ | 13,034 |
| | $ | (2,968 | ) | | $ | 13,068 |
|
Deferred tax provision: | | | | | |
Federal | $ | (767 | ) | | $ | 9,052 |
| | $ | (6,903 | ) |
State | (435 | ) | | (95 | ) | | (1,723 | ) |
Total deferred tax (benefit) provision | (1,202 | ) | | 8,957 |
| | (8,626 | ) |
Income tax expense | $ | 11,832 |
| | $ | 5,989 |
| | $ | 4,442 |
|
As a result of the Business Combination during the fiscal year ended 2015, a change in the ownership of the Company occurred which, pursuant to the Internal Revenue Code, will limit on an annual basis the Company's ability to utilize its U.S. Net Operating Losses ("NOLs") and U.S. tax credits. The Company's NOLs and credits will continue to be available to offset taxable income and tax liabilities (until such NOLs and credits are either used or expire), subject to the Section 382 annual limitation. If the annual limitation amount is not fully utilized in a particular tax year, then the unused portion from that particular tax year will be added to the annual limitation in subsequent years. During the fiscal year ended 2016, the Company had a Change in Control of its majority stockholder and does not expect any Section 382 limitations to impair the Company's ability to realize all tax attributes.
At September 30, 2017, the Company had approximately $0.5 million of federal tax credit carryforwards that expire at various dates through 2036.
The effective tax rates for the fiscal years ended 2017, 2016 and 2015 were 31.7%, 57.9% and 26.3%, respectively. The effective tax rate for the fiscal year ended 2017 differed from the statutory federal income tax rate of 35%, reflecting the benefits of income tax credits, the domestic production activities deduction, and recording a tax windfall from share-based compensation awards exercised, which were offset by the application of tax credits claimed as offsets against our payroll tax liabilities, and interest and penalties on uncertain tax positions. The effective tax rate for the fiscal year ended 2016 differed from the statutory federal income tax rate of 35%, primarily as a result of discrete items increasing tax expense in the period, including a change in investor tax on our non-consolidated affiliate income, the application of tax credits claimed as offsets against our payroll tax liabilities, interest and penalties on uncertain tax positions, limitations of the deductibility of certain share-based compensation, a net tax shortfall associated with the vesting of share-based compensation awards pursuant to adoption of ASU 2016-09, which were partially offset by recording the impact of new tax legislation. The effective tax rate for the fiscal year ended 2015 differed from the statutory federal income tax rate of 35%, primarily as a result of a benefit from the change in investor tax on our non-consolidated affiliate, domestic production activities deduction, state tax items and other permanent items which were partially offset by interest and penalties on an uncertain tax position and transaction costs.
A reconciliation between the reported income tax expense for continuing operations and the amount computed by applying the statutory federal income tax rate of 35% is as follows:
|
| | | | | | | | | | | |
(in thousands of dollars) | 2017 | | 2016 | | 2015 |
Federal taxes at statutory rate | $ | 13,050 |
| | $ | 3,619 |
| | $ | 5,904 |
|
Increase (reduction) in income taxes resulting from: | | | | | |
State taxes, net | 307 |
| | (20 | ) | | (949 | ) |
Change in uncertain tax positions | 651 |
| | 821 |
| | 833 |
|
Share-based compensation | (210 | ) | | 1,001 |
| | — |
|
Permanent items | (701 | ) | | (84 | ) | | (954 | ) |
Valuation allowance | 90 |
| | 27 |
| | (1 | ) |
Tax credits | (530 | ) | | (470 | ) | | (90 | ) |
Return to accrual true-ups | (646 | ) | | (78 | ) | | (386 | ) |
Investor tax on non-consolidated affiliate income | (271 | ) | | 582 |
| | 425 |
|
Tax rate adjustments | 144 |
| | 535 |
| | (1,854 | ) |
Transaction costs | — |
| | — |
| | 1,364 |
|
Other | (52 | ) | | 56 |
| | 150 |
|
Income tax expense | $ | 11,832 |
| | $ | 5,989 |
| | $ | 4,442 |
|
During fiscal 2015, there were changes in assumptions about the Company’s ability to utilize U.S. foreign tax credits. The resulting tax rate change was applied to the cumulative beginning of year deferred tax balance for the non-consolidated affiliate, and a $1.7 million benefit was recorded to fiscal 2015 tax expense.
The total amount of gross unrecognized tax benefits at September 30, 2017 and October 1, 2016 were $6.4 million and $6.4 million, respectively, which would affect the Company’s effective tax rate if realized. The Company’s liability arising from uncertain tax positions is recorded in other non-current liabilities on the Consolidated Balance Sheets.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. The accrued interest and penalties were $2.9 million and $2.1 million at September 30, 2017 and October 1, 2016, respectively.
The Company is subject to taxation mostly in the United States and various state jurisdictions. At September 30, 2017, tax years prior to 2014 are generally no longer subject to examination by federal and most state tax authorities.
The following table sets forth the sources of and differences between the financial accounting and tax bases of the Company’s assets and liabilities which give rise to the net deferred tax assets at the dates indicated:
|
| | | | | | | |
(in thousands of dollars) | September 30, 2017 | | October 1, 2016 |
Deferred tax liabilities | | | |
Property, plant and equipment | $ | (2,282 | ) | | $ | (2,438 | ) |
Other intangible assets | (18,030 | ) | | (17,275 | ) |
Investor tax on non-consolidated affiliate income | (2,230 | ) | | (2,453 | ) |
Other assets | (527 | ) | | (520 | ) |
Total deferred tax liabilities | $ | (23,069 | ) | | $ | (22,686 | ) |
Deferred tax assets | | | |
NOL carryforward | $ | 550 |
| | $ | 632 |
|
Accrued expenses | 9,575 |
| | 9,310 |
|
Indirect effect of uncertain tax position | 2,869 |
| | 2,747 |
|
Compensation | 14,095 |
| | 21,545 |
|
Inventories | 1,576 |
| | 1,081 |
|
Unearned income | 4,000 |
| | 3,492 |
|
Tax credits | 2,809 |
| | 3,517 |
|
Total deferred tax assets | $ | 35,474 |
| | $ | 42,324 |
|
Less: valuation allowance | (650 | ) | | (558 | ) |
Deferred tax assets less valuation allowance | $ | 34,824 |
| | $ | 41,766 |
|
Net deferred tax assets | $ | 11,755 |
| | $ | 19,080 |
|