Income Taxes
The components of the provision for income taxes of continuing operations are as follows:
|
| | | | | | | | | | | | |
| | Year Ended September 30, |
| | 2017 | | 2016 | | 2015 |
Current tax provision (benefit): | | |
| | |
| | |
|
U.S. Federal | | $ | (234 | ) | | $ | — |
| | $ | (32,116 | ) |
State | | 613 |
| | 672 |
| | (1,375 | ) |
Foreign | | (210 | ) | | 176 |
| | 203 |
|
| | 169 |
| | 848 |
| | (33,288 | ) |
Deferred tax (benefit) expense: | | |
| | |
| | |
|
U.S. Federal | | (592 | ) | | 25,338 |
| | 326 |
|
State | | (86 | ) | | 3,890 |
| | (4,422 | ) |
Foreign | | 58 |
| | (3,051 | ) | | (2,187 | ) |
| | (620 | ) | | 26,177 |
| | (6,283 | ) |
Total (benefit) provision | | $ | (451 | ) | | $ | 27,025 |
| | $ | (39,571 | ) |
Deferred taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows:
|
| | | | | | | | |
| | September 30, |
| | 2017 | | 2016 |
Deferred tax assets: | | |
| | |
|
Net operating losses—Foreign | | $ | 9,171 |
| | $ | 8,964 |
|
Net operating losses—U.S. | | 31,133 |
| | 17,086 |
|
Accrued vacation and bonus | | 859 |
| | 1,305 |
|
Inventory capitalization | | 1,315 |
| | 1,906 |
|
Inventory reserves | | 1,903 |
| | 1,311 |
|
Allowance for doubtful accounts | | 98 |
| | 120 |
|
Stock compensation expense | | 6,689 |
| | 8,105 |
|
Amortization of intangibles | | 2,753 |
| | 2,286 |
|
Amortization of goodwill | | — |
| | 1,021 |
|
Pension liability | | — |
| | 133 |
|
Restructuring costs | | 913 |
| | — |
|
Other | | 3,134 |
| | 3,699 |
|
Total deferred tax assets before valuation allowance | | 57,968 |
| | 45,936 |
|
Less: valuation allowance | | (54,379 | ) | | (44,257 | ) |
Net deferred tax assets | | 3,589 |
| | 1,679 |
|
Deferred tax liabilities: | | |
| | |
|
Amortization of goodwill | | 9,000 |
| | 9,444 |
|
Depreciation | | 185 |
| | 658 |
|
Capitalized costs | | 3,032 |
| | — |
|
Pension liability | | 372 |
| | — |
|
Total deferred tax liabilities | | $ | 12,589 |
| | $ | 10,102 |
|
Net deferred taxes | | $ | (9,000 | ) | | $ | (8,423 | ) |
The reconciliation of the U.S. federal statutory rate to the effective rate for continuing operations is as follows:
|
| | | | | | | | | |
| | Year Ended September 30, |
| | 2017 | | 2016 | | 2015 |
U.S. statutory rate | | 35.0 | % | | 35.0 | % | | 35.0 | % |
Permanent items | | (0.9 | )% | | (4.2 | )% | | (6.3 | )% |
State taxes | | 1.2 | % | | 1.9 | % | | 2.6 | % |
Net foreign rate differential | | (2.8 | )% | | (3.8 | )% | | (3.0 | )% |
Unrecognized tax benefits | | 3.5 | % | | (2.2 | )% | | — | % |
Change in valuation allowance | | (34.8 | )% | | (108.8 | )% | | (0.9 | )% |
Other | | (0.06 | )% | | — | % | | — | % |
Provision for income taxes | | 1.1 | % | | (82.1 | )% | | 27.4 | % |
At September 30, 2017 and 2016, the Company had federal and state deferred tax assets of $45.4 million and $35.8 million, respectively, related to available federal and state net operating loss (NOL) carryforwards and other U.S. deductible temporary differences. The NOL carryforwards expire beginning in 2035 through 2037. At September 30, 2017 and 2016, the Company had deferred tax assets related to available foreign NOL carryforwards of approximately $9.2 million and $9.0 million respectively. All but approximately $0.5 million of our foreign NOLs maintain an indefinite carry forward life. The NOLs with limited carryforward periods will expire beginning in 2018 through 2037.
The Company assesses available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended September 30, 2017. Such objective evidence limits the ability to consider other evidence such as our projections for future growth. On the basis of this evaluation, the Company recorded a valuation change of $10.1 million to bring the total valuation allowance to $54.4 million at September 30, 2017.
The Company has not recorded a provision for deferred U.S. tax expense on the undistributed earnings of foreign subsidiaries since the Company intends to indefinitely reinvest the earnings of these foreign subsidiaries outside the U.S. The amount of such undistributed foreign earnings was approximately $8.0 million as of September 30, 2017. As of September 30, 2017, and 2016, approximately $14.9 million and $21.5 million, respectively, of cash and cash equivalents was held overseas and not available to fund domestic operations without incurring taxes upon repatriation.
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits:
|
| | | | | | | | | | |
| | Year Ended September 30, (In thousands) |
| | 2017 | | 2016 | | 2015 |
Beginning balance at October 1 | | $ | 725 |
| | — |
| | — |
|
Additions based on positions related to the current year | | — |
| | — |
| | — |
|
Additions for tax positions of prior years | | 1,426 |
| | 725 |
| | — |
|
Reductions for tax positions of prior years | | (229 | ) | | — |
| | — |
|
Settlements | | (1,922 | ) | | — |
| | — |
|
Balance at September 30 | | $ | — |
| | 725 |
| | — |
|
The Company applies the authoritative guidance related to uncertainty in income taxes. ASC 740 states that a benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits. During fiscal year 2017, we reduced our deferred tax asset and valuation allowance for our net operating loss carryforward by $1.2 million for unrecognized tax benefits related to federal and state exposures. We recorded a net tax benefit of $1.4 million comprised of a $1.2 million recovery of tax deductions related to equity compensation previously recorded to equity and a $0.2 million recovery of prior year taxes. The Company has agreed to settle all previously unrecognized tax benefits with the IRS and anticipates no additional adjustments for fiscal years 2013 through 2015.
The Company's policy is to recognize interest and penalties in the period in which they occur in the income tax provision. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, various state and local jurisdictions and in foreign jurisdictions, primarily Canada and the U.K. Currently, the Company is subject to income tax examinations for fiscal years 2012 through 2015. The Company anticipates no material tax liability to arise from these examinations. The statute of limitations for years prior to fiscal year 2013 is now closed. However, certain tax attribute carryforwards that were generated prior to fiscal year 2013 may be adjusted upon examination by tax authorities if they are utilized.