Annual report pursuant to Section 13 and 15(d)

Note 13 - Income Taxes

v3.19.2
Note 13 - Income Taxes
12 Months Ended
Jun. 30, 2019
Notes to Financial Statements  
Income Tax Disclosure [Text Block]
(
13
)
Income Taxes
 
Income tax expense attributable to income before income taxes consists of the following for the fiscal years ended
June 30 (
in thousands):
 
   
2019
   
2018
   
2017
 
Current:
                       
Federal
  $
10,133
    $
10,289
    $
15,265
 
State
   
1,237
     
1,689
     
1,585
 
Foreign
   
304
     
824
     
445
 
Total current
   
11,674
     
12,802
     
17,295
 
Deferred:
                       
Federal
   
(3,092
)    
174
     
3,413
 
State
   
(381
)    
(124
)    
85
 
Foreign
   
(39
)    
(156
)    
8
 
Total deferred
   
(3,512
)    
(106
)    
3,506
 
Income tax expense
  $
8,162
    $
12,696
    $
20,801
 
 
The following is a reconciliation of expected income tax expense (benefit) (computed by applying the federal statutory income tax rate to income before taxes) to actual income tax expense (benefit) (in thousands):
 
   
2019
   
2018
   
2017
 
                                                 
Expected income tax expense
  $
7,111
     
21.0
%   $
13,739
     
28.0
%   $
19,947
     
35.0
%
State income taxes, net of federal income tax
   
737
     
2.2
%    
1,263
     
2.6
%    
1,403
     
2.5
%
Valuation allowance
   
602
     
1.8
%    
42
     
0.1
%    
329
     
0.6
%
Re-measurement of deferred taxes
   
-
     
0.0
%    
(2,651
)    
-5.4
%    
-
     
-
 
Section 199 Qualified Production Activities deduction
   
-
     
0.0
%    
(678
)    
-1.4
%    
(999
)    
-1.8
%
Section 250 Foreign Derived Intangible Income deduction
   
(161
)    
-0.5
%    
-
     
0.0
%    
-
     
0.0
%
Unrecognized tax expense (benefit)
   
26
     
0.1
%    
55
     
0.1
%    
(48
)    
-0.1
%
Stock-based compensation - forfeitures and exercises
   
184
     
0.5
%    
570
     
1.2
%    
-
     
-
 
Other, net
   
(337
)    
-1.0
%    
356
     
0.7
%    
169
     
0.3
%
Actual income tax expense
  $
8,162
     
24.1
%   $
12,696
     
25.9
%   $
20,801
     
36.5
%
 
 
The significant components of deferred tax assets recorded within the consolidated balance sheet were as follows (in thousands):
 
   
2019
   
2018
 
Deferred tax assets:
               
Employee compensation accruals
  $
2,697
    $
2,729
 
Stock-based compensation
   
715
     
933
 
Deferred rent credits
   
4,184
     
4,407
 
Net operating loss carryforwards
   
4,259
     
3,959
 
Property, plant and equipment
   
1,021
     
-
 
Goodwill
   
77
     
328
 
Reserves
   
863
     
247
 
Other, net
   
1,401
     
1,460
 
Subtotal deferred tax assets
   
15,217
     
14,063
 
Less: Valuation allowance
   
(3,197
)    
(2,527
)
Total net deferred tax assets
  $
12,020
    $
11,536
 
 
The significant components of deferred tax liabilities recorded within the consolidated balance sheet were as follows (in thousands)
 
   
2019
   
2018
 
Property, plant and equipment
  $
-
    $
2,827
 
Intangible assets other than goodwill
   
9,007
     
8,951
 
Commissions
   
1,974
     
2,230
 
Total deferred tax liability
  $
10,981
    $
14,008
 
 
 
The deferred tax balances are classified in the consolidated balance sheets as follows at
June 30 (
in thousands):
 
   
2019
   
2018
 
Non-current assets
  $
2,108
    $
1,688
 
Non-current liabilities
   
1,069
     
4,160
 
Total net deferred tax asset (liability)
  $
1,039
    $
(2,472
)
 
 
Commencing with fiscal
2018
the Company is prospectively reporting its deferred tax assets and liabilities as non-current in conformance with ASU
2015
-
17,
Balance Sheet Classification of Deferred Tax Assets
. Prior to that, current deferred tax assets and liabilities and non-current deferred tax assets and liabilities were presented net in the consolidated balance sheets.
 
We evaluate our deferred tax assets to determine if the “more likely than
not
standard of evidence has
not
been met thereby supporting the need for a valuation allowance. A valuation allowance must be established for deferred tax assets when it is
not
more likely than
not
that assets will be realized. At
June 30, 2019,
such an allowance was in place against the Belgian and Canadian foreign tax assets, and totaled
$3.2
million compared to
$2.5
million at
June 30, 2018.
 
The Company’s deferred income tax assets at
June 30, 2019
with respect to the net operating losses expire as follows (in thousands):
 
   
Deferred Income
   
Net Operating Loss
 
   
Tax Assets
   
Carryforwards
 
United States (federal and state), expiring between 2023 and 2032
  $
1,168
    $
20,662
 
Foreign, expiring between 2034 and 2039
  $
3,091
    $
9,566
 
 
Deferred federal income taxes were previously
not
provided for unremitted foreign earnings of our foreign subsidiaries because we expected those earnings to be indefinitely reinvested. As part of the Tax Act, the Company reported the Deemed Repatriation Transition Tax (the “Transition Tax”) on previously untaxed accumulated earnings and profits (“E&P”) of certain of our foreign subsidiaries. To determine the amount of the Transition Tax, we determined, in addition to other factors, the amount of post-
1986
E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. We reported a Transition Tax obligation of
$0.1
million for the fiscal year ended
June 30, 2018.
 
On
December 22, 2017,
the Tax Act was enacted. Among the significant changes to the United States Internal Revenue Code, the Tax Act lowered the United States federal corporate income tax rate (“Federal Tax Rate”) from
35%
to
21%
effective
January 1, 2018,
introduced a limitation on the deduction of certain interest expenses, introduced a deduction for certain business capital expenditures and introduced a system of taxing foreign-sourced income from multinational corporations. The Company computed its income tax expense for the
2018
fiscal year using a blended Federal Tax Rate of
28%.
The
21%
Federal Tax Rate applies to fiscal years ending
June 30, 2019
and each year thereafter. The Company re-measured its net deferred tax assets and liabilities using the Federal Tax Rate that would apply when these amounts were expected to reverse. At
June 30, 2018,
the Company’s re-measurement of its deferred tax assets and liabilities resulted in a discrete tax benefit
$2.7
million, which lowered the effective tax rate by
5.4%
for that fiscal year.
 
Uncertain Tax Positions
 
We recognize interest and penalties related to income tax matters as a component of income tax expense. If the
$2.2
million of unrecognized tax benefits and related interest and penalties as of
June 30, 2019
were recognized, approximately
$1.7
million would be recorded as a benefit to income tax expense.
 
A reconciliation of the beginning and ending amount of unrecognized tax benefits including related interest and penalties as of
June 30, 2019
and
2018
is as follows (in thousands):
 
   
2019
   
2018
 
Beginning balance
  $
2,187
    $
2,106
 
Additions for tax positions taken during the current year
   
329
     
360
 
Additions for tax positions taken during the prior year
   
143
     
107
 
Reductions for tax positions taken in prior years
   
(450
)    
(386
)
Decreases related to settlements with taxing authorities
   
-
     
-
 
Ending balance
  $
2,209
    $
2,187
 
 
It is reasonably possible that various issues relating to approximately
$0.6
million of the total gross unrecognized tax benefits as of
June 30, 2019
will be resolved within the next
twelve
months as exams are completed or statutes expire. If recognized, approximately
$0.6
million of unrecognized tax benefits would reduce our tax expense in the period realized. However, actual results could differ from those currently anticipated.
 
The Company conducts business globally and, as a result, the Company or
one
or more of its subsidiaries files income tax returns in the United States, various state, and foreign jurisdictions. In the normal course of business, the Company is subject to examination by the taxing authorities in such major jurisdictions as the United States, Canada, Mexico, Belgium and Honduras. As of
June 30, 2019,
the Company and certain subsidiaries are currently under audit from
2015
through
2017
in the United States. While the amount of uncertain tax benefits with respect to the entities and years under audit
may
change within the next
twelve
months, it is
not
anticipated that any of the changes will be significant.