Income Tax Expense

12 Months Ended

Sep. 30, 2019

Income Tax Expense

Income Tax Expense

7.      Income Tax Expense

The components of income before income taxes for 2019, 2018 and 2017 consisted of the following:

(Dollars in thousands)	2019		2018	2017
United States	$	93,654	80,994	72,353
Foreign		8,562	7,029	7,800
Total income before income taxes	$	102,216	88,023	80,153

The principal components of income tax expense (benefit) for 2019, 2018 and 2017 consist of:

(Dollars in thousands)	2019		2018	2017
Federal:
Current	$	14,097	9,174	21,448
Deferred		1,020	(22,943)	628
State and local:
Current		3,189	2,121	1,795
Deferred		204	2,972	(49)
Foreign:
Current		2,493	2,233	4,450
Deferred		174	2,330	(1,822)
Total	$	21,177	(4,113)	26,450

The actual income tax expense (benefit) for 2019, 2018 and 2017 differs from the expected tax expense for those years (computed by applying the U.S. Federal corporate statutory rate) as follows:

	2019		2018		2017
Federal corporate statutory rate	21.0	%	24.5	%	35.0	%
State and local, net of Federal benefits	3.3		3.0		2.4
Foreign	0.7		0.6		(0.1)
Research credit	(0.9)		(1.6)		(1.1)
Domestic production deduction	—		(1.1)		(2.7)
Change in uncertain tax positions	(0.1)		(0.1)		—
Executive compensation	0.3		(0.1)		(0.1)
Valuation allowance	(2.4)		3.0		(0.3)
GILTI and FDII	(0.8)		—		—
Tax reform – impact on U.S. deferred tax assets and liabilities	(0.3)		(37.2)		—
Tax reform – transition tax	(0.1)		1.5		—
Tax reform – taxes related to foreign unremitted earnings	—		2.8		—
Other, net	—		—		(0.1)
Effective income tax rate	20.7	%	(4.7)	%	33.0	%

On December 22, 2017, President Trump signed into law new tax legislation commonly referred to as the Tax Cut and Jobs Act (the “TCJA”). Provisions under the TCJA that became effective for the Company in the current fiscal year include a further reduction in the U.S. statutory rate to 21%, a new minimum tax on global intangible low-taxed income (“GILTI”), the benefit of the deduction for foreign-derived intangible income ("FDII"), and changes to IRC Section 162(m) related to the deductibility of executive compensation.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at September 30, 2019 and 2018 are presented below:

(Dollars in thousands)	2019		2018
Deferred tax assets:
Inventories	$	5,089	5,834
Pension and other postretirement benefits		5,533	3,969
Net operating and capital loss carryforwards — domestic		617	639
Net operating loss carryforward — foreign		3,766	4,603
Foreign tax credit carryforward		—	2,377
Other compensation-related costs and other cost accruals		7,952	7,048
State credit carryforward		1,914	2,103
Total deferred tax assets		24,871	26,573
Deferred tax liabilities:
Timing differences related to revenue recognition		(1,508)	—
Goodwill		(2,673)	(969)
Acquisition assets		(60,224)	(62,841)
Depreciation, software amortization		(20,161)	(19,584)
Net deferred tax liabilities before valuation allowance		(59,695)	(56,821)
Less valuation allowance		(4,520)	(7,144)
Net deferred tax liabilities	$	(64,215)	(63,965)

The Company has a foreign net operating loss (NOL) carryforward of $16.6 million at September 30, 2019, which reflects tax loss carryforwards in Germany, Finland, South Africa, Japan, Canada, Norway and the United Kingdom. Approximately $16.0 million of the tax loss carryforwards have no expiration date while the remaining $0.6 million will expire between 2027 and 2039. The Company has deferred tax assets related to state NOL carryforwards of $0.6 million at September 30, 2019 which expire between 2027 and 2039. The Company also has net state research and other credit carryforwards of $1.9 million of which $1.4 million expires between 2025 and 2037. The remaining $0.5 million does not have an expiration date.

The valuation allowance for deferred tax assets as of September 30, 2019 and 2018 was $4.5 million and $7.1 million, respectively. The net change in the total valuation allowance for each of the years ended September 30, 2019 and 2018 was a decrease of $2.6 million and an increase of $2.7 million, respectively. The Company has established a valuation allowance for excess foreign tax credits that are not expected to be utilized in future periods of $0 and $2.4 million at September 30, 2019 and 2018, respectively. The Company has established a valuation allowance against state credit carryforwards of $0.4 million at both September 30, 2019 and 2018. In addition, the Company has established a valuation allowance against state NOL carryforwards that are not expected to be realized in future periods of $0.6 million at both September 30, 2019 and 2018. Lastly, the Company has established a valuation allowance against certain NOL carryforwards in foreign jurisdictions which may not be realized in future periods of $3.6 million and $3.8 million at September 30, 2019 and 2018, respectively.

On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act, which made comprehensive changes to U.S. federal income tax laws by moving from a global to a modified territorial tax regime. As a result, cash repatriated to the U.S. is generally no longer subject to U.S. federal income tax. No provision is made for foreign withholding any applicable U.S. income taxes on the undistributed earnings of non-U.S. where these earnings are considered indefinitely invested or otherwise retained for continuing international operations. Determination of the amount of taxes that might be paid on these undistributed earnings if eventually remitted is not practicable.

The Company had $0 and $0.1 million of unrecognized tax benefits as of September 30, 2019 and 2018, respectively, which, if recognized, would affect the Company’s effective tax rate. The Company’s policy is to include interest related to unrecognized tax benefits in income tax expense and penalties in operating expense. As of September 30, 2019, 2018 and 2017, the Company had zero accrued interest related to uncertain tax positions on its Consolidated Balance Sheets. No penalties have been accrued.

The principal jurisdictions for which the Company files income tax returns are U.S. Federal and the various city, state, and international locations where the Company has operations. The U.S. Federal tax years for the periods ended September 30, 2016 and forward remain subject to income tax examination. Various state tax years for the periods ended September 30, 2015 and forward remain subject to income tax examinations. The Company is subject to income tax in many jurisdictions outside the United States, none of which is individually significant.