Income Taxes

9 Months Ended

Jun. 30, 2020

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The calculation of the effective tax rate is as follows (in thousands):

	Three months ended June 30,						Nine months ended June 30,
	2020			2019			2020			2019
Income before income taxes	$	2,922		$	5,886		$	15,810		$	4,315
Income tax provision (benefit)	(559		)	797			2,133			963
Net income	$	3,481		$	5,089		$	13,677		$	3,352
Effective tax rate	(19		)%	14		%	13		%	22		%

Our income tax (benefit) provision reflects an effective tax rate on pre-tax income of negative 19% for the third quarter of Fiscal 2020 compared to 14% in the third quarter of Fiscal 2019. The effective tax rate for the quarter ended June 30, 2020 was favorably impacted by the tax benefits related to the Research and Development Tax Credit (R&D Tax Credit) and the projected utilization of net operating loss carryforwards in Canada that were fully reserved with a valuation allowance. In addition, as a result of the expiration of certain U.S. federal statutes of limitations and the effective settlement of an Internal Revenue Service (IRS) audit, $1.7 million of reserves for unrecognized tax benefits related to these matters was released. These benefits were partially offset by losses recognized in various foreign jurisdictions that were reserved with a valuation allowance. For the third quarter of Fiscal 2019, the effective tax rate was favorably impacted by the relative amounts of income recognized in various foreign jurisdictions that were reserved with a valuation allowance.

The effective tax rate of 13% for the nine months ended June 30, 2020 was favorably impacted by the current year estimated R&D Tax Credit as well as the projected utilization of net operating loss carryforwards in Canada that were fully reserved with a valuation allowance. Likewise, the discrete items recorded in the third quarter of Fiscal 2020 in the amount of $1.7 million associated with the release of reserves for unrecognized tax benefits as a result of the expiration of statutes of limitations and the IRS audit settlement favorably impacted the effective tax rate. The effective tax rate was negatively impacted by the discrete item recorded in the second quarter of Fiscal 2020 for the valuation allowance against our UK deferred tax assets in the amount of $0.5 million as well as by the losses recognized in various foreign jurisdictions that were reserved with a valuation allowance. For the nine months ended June 30, 2019, the effective tax rate of 22% approximated the U.S. federal statutory rate as the immaterial losses incurred by various foreign jurisdictions reserved with a valuation allowance had a minimal impact on the effective tax rate. There were no material discrete items recognized in the first nine months of Fiscal 2019.

During our assessment of deferred income taxes, in the second quarter of Fiscal 2020, we recorded a valuation allowance of $0.5 million against our UK net deferred tax assets. In assessing the realizability of net deferred tax assets, we determined it was more-likely-than-not that the net deferred tax assets may not be realized based upon recent UK tax losses and anticipated results in the near term. Estimates may change as new events occur, estimates of future taxable income are reduced or increased, additional information becomes available, or operating environments change, which may result in a full or partial reversal of the valuation allowance.

Due to the expiration of certain federal statutes of limitations and the settlement of the IRS audit discussed above, management believes that, within the next twelve months, it is reasonably possible that the unrecognized tax benefits will remain materially unchanged. We are unable to make reasonably reliable estimates regarding the timing of future cash outflows, if any, associated with the remaining unrecognized tax benefits for the open periods of Fiscal 2018 - 2020.