Income Taxes

12 Months Ended

Sep. 30, 2020

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The components of the income tax provision (benefit) were as follows (in thousands): 

	Year Ended September 30,
	2020		2019		2018
Current:
Federal	$	945	$	1,350	$	973
State	1,186		186		201
Foreign	66		88		449
	2,197		1,624		1,623
Deferred:
Federal	1,045		366		(1,834)
State	(91)		457		(247)
Foreign	519		(3)		(89)
	1,473		820		(2,170)
Total income tax provision (benefit)	$	3,670	$	2,444	$	(547)

Income (loss) before income taxes was as follows (in thousands): 

	Year Ended September 30,
	2020		2019		2018
U.S.	$	21,243	$	11,859	$	(2,103)
Foreign	(913)		475		(5,596)
Income (loss) before income taxes	$	20,330	$	12,334	$	(7,699)

A reconciliation of the statutory U.S. income tax rate and the effective income tax rate, as computed on earnings before income tax provision in each of the three years presented in the Consolidated Statements of Operations, was as follows:

	Year Ended September 30,
	2020		2019		2018
Statutory rate	21	%	21	%	25	%
State income taxes, net of federal benefit	5		4		(2)
Research and development credit	(13)		(7)		9
Foreign rate differential	—		1		1
Foreign withholding	—		1		(3)
Valuation allowance	4		(2)		(20)
Deferred tax rate differential	—		—		(4)
Other	1		2		1
Effective rate	18	%	20	%	7	%

On December 22, 2017, the new tax law lowered the corporate tax rate from 35% to 21% effective January 1, 2018. As a result, the U.S. federal statutory rate for Fiscal 2020 and 2019 is 21%, compared to the blended statutory rate of 24.5% effective for Fiscal 2018.

Our income tax provision (benefit) reflects an effective tax rate on pre-tax results of 18% in Fiscal 2020 compared to 20% and 7% in Fiscal 2019 and 2018, respectively. The effective tax rate of 18% for Fiscal 2020 was favorably impacted by the current year estimated Research and Development Tax Credit ("R&D Tax Credit") as well as the 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 U.K. 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. The effective tax rate for Fiscal 2019 approximated the U.S. federal statutory rate as favorable adjustments related to the utilization of net operating loss carryforwards in Canada that were fully reserved with a valuation allowance, and the R&D Tax Credit were largely offset by unfavorable adjustments primarily related to state income taxes and other permanent items. Due to the loss position in Fiscal 2018, the effective tax rate was negatively impacted by foreign losses reserved for with a valuation allowance as well as $0.5 million of tax expense related to the re-measurement of U.S. deferred tax assets as a result of tax reform.

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 U.K. 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 U.K. 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.

We have not recorded deferred income taxes on $16.1 million of undistributed earnings of our foreign subsidiaries because of management’s intent to indefinitely reinvest such earnings. Upon distribution of these earnings in the form of dividends or otherwise, we may be subject to U.S. income taxes and foreign withholding taxes. It is not practical, however, to estimate the amount of taxes that may be payable on the eventual remittance of these earnings.

We are subject to income tax in the U.S., multiple state jurisdictions and certain international jurisdictions, primarily the U.K. and Canada. We do not consider any state in which we do business to be a major tax jurisdiction. We remain open to examination in the other jurisdictions as follows:  Canada 2013 – 2019, United Kingdom 2018 – 2019 and the United States

2018 – 2019. As of September 30, 2020, we did not have any state audits underway that would have a material impact on our financial position or results of operations.

The net deferred income tax asset was comprised of the following (in thousands): 

	September 30,
	2020		2019
Gross assets	$	18,326	$	18,851
Gross liabilities and valuation allowance	(14,682)		(13,734)
Net deferred income tax asset	$	3,644	$	5,117

The tax effect of temporary differences between U.S. GAAP accounting and federal income tax accounting creating deferred income tax assets and liabilities was as follows (in thousands):

	September 30,
	2020		2019
Deferred Tax Assets:
Net operating loss	$	10,823	$	10,636
Credit carryforwards	1,490		2,895
Deferred compensation	1,681		1,590
Uniform capitalization and inventory	1,067		983
Stock-based compensation	1,079		744
Reserve for accrued employee benefits	929		752
Warranty accrual	655		682
Accrued legal	112		115
Postretirement benefits liability	111		110
Other	379		344
Deferred tax assets	$	18,326	$	18,851
Deferred Tax Liabilities:
Depreciation and amortization	$	(5,035)	$	(5,138)
Retention and other	(620)		(365)
Deferred tax liabilities	$	(5,655)	$	(5,503)
Less: valuation allowance	(9,027)		(8,231)
Net deferred tax asset	$	3,644	$	5,117

As of September 30, 2020, we had tax credit carryforwards of $0.1 million not reserved with a valuation allowance that are available to reduce future U.S. federal tax liabilities. The majority of these tax credit carryforwards expire beginning in 2030. In addition, we had international net operating loss carryforwards of $0.8 million that were not reserved with a valuation allowance available to offset future taxable income in the respective jurisdictions, with approximately $0.2 million expiring in 2029 and 2030 and the remainder having an indefinite carryforward period.

We have established a valuation allowance in the amount of $9.0 million primarily related to the Canadian and U.K. net deferred tax assets. The net change in the total valuation allowance during the year was $0.8 million which was largely a result of the establishment of a valuation allowance on the net deferred tax assets of the U.K. In assessing the realizability of net deferred tax assets, we consider whether it is more-likely-than-not that some portion or all of the net deferred tax assets may not be realized. The ultimate realization of net deferred tax assets is dependent on the generation of future taxable income during the periods in which those temporary differences become deductible.  

A reconciliation of the beginning and ending amount of the unrecognized tax benefits follows (in thousands):

	Year Ended September 30,
	2020		2019		2018
Balance at beginning of period	$	2,703	$	1,854	$	1,219
Increases related to tax positions taken during the current period	220		240		180
Increases related to tax positions taken during a prior period	97		609		455
Decreases related to expiration of statute of limitations	(545)		—		—
Decreases related to settlement with taxing authorities	(1,223)		—		—
Balance at end of period	$	1,252	$	2,703	$	1,854

Included in the balance of unrecognized tax benefits at the end of Fiscal 2020, 2019, and 2018 are $0.8 million, $2.1 million, and $1.3 million, respectively, of tax benefits that, if recognized, would affect the effective tax rate. Our policy is to recognize interest and penalties related to income tax matters as tax expense. The amount of interest and penalty expense recorded for the year ended September 30, 2020 was not material.

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 decrease by approximately $0.1 million due to the settlement with taxing authorities related to voluntary filings. 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.

Management believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in our tax audits are resolved in a manner not consistent with management’s expectations, we could be required to adjust our provision for income tax in the period such resolution occurs.