Note 4—Income Taxes

On December 22, 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was signed into law. The 2017 Tax Act includes a broad range of tax reform provisions affecting businesses, including lower corporate tax rates, changes in business deductions, and international tax provisions. In response to the 2017 Tax Act, the U.S. Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations where a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Act. SAB 118 provides that the measurement period is complete when a company’s accounting is complete and that the measurement period shall not extend beyond one year from the enactment date. SAB 118 provides guidance for registrants under three scenarios: (i) measurement of certain income tax effects is complete, (ii) measurement of certain income tax effects can be reasonably estimated, and (iii) measurement of certain income tax effects cannot be reasonably estimated.

The 2017 Tax Act lowered the federal statutory tax rate from 35% to 21%. As the Company has a fiscal year ending April 30, it is subject to a blended tax rate for the 2018 fiscal year. Therefore, a blended rate of 29.73% was computed as the federal statutory rate for fiscal year 2018.

The Company has analyzed the income tax effects of the 2017 Tax Act and determined that measurement of the income tax effects can be reasonably estimated, and, as such, provisional amounts have been recorded. The Company believes that all provisional amounts reflected in its financial statements are based on the best estimates that can be made at this time. The Company will continue to analyze all impacts of the 2017 Tax Act and will update provisional amounts as required.

In accordance with ASC 740, ”Income Taxes”, which requires deferred taxes to be re-measured in the year of an income tax rate change, the Company recorded a deferred income tax expense of $680,000 for the year ended April 30, 2018 as a result of applying a lower U.S. federal income tax rate to the Company’s net deferred tax assets. The Company revalued the U.S. deferred tax balances based on the tax rates effective for the following fiscal year at the new federal rate of 21% for amounts that did not reverse during the 2018 fiscal year and revalued the deferred tax balances that reversed in the 2018 fiscal year at the Company’s 2018 fiscal year statutory rate of 33.33%.

The 2017 Tax Act also includes a one-time transition tax on accumulated unrepatriated foreign earnings. For the year ended April 30, 2018, the Company recorded a provisional income tax expense of $649,000 on accumulated unrepatriated foreign earnings, including foreign earnings through December 31, 2017. In addition, the Company has not yet completed the calculation of the related income tax pools for all of its foreign subsidiaries. The Company anticipates additional future impacts at a U.S., state and local tax level related to the 2017 Tax Act as statutory and interpretive guidance continues to become available from applicable tax authorities needed to record the complete tax expense. For the year ended April 30, 2018, the Company included federal and state provisional income tax expense based on available statutory and interpretive guidance on the provisions of the tax laws that were in effect at April 30, 2018.

The Company is entitled to elect to pay the one-time transition tax over a period of eight years. The Company intends to make this election and has recorded $546,000 of the provisional expense as other non-current liabilities in the Company’s Consolidated Balance Sheet for April 30, 2018. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations.

The Company is currently in the process of evaluating the new Global Intangible Low-Taxed Income (“GILTI”) provisions and has not yet elected an accounting policy with respect to whether to reflect GILTI in its deferred tax calculations or not. Therefore, the Company has not made any adjustments related to the GILTI tax in its consolidated financial statements. Under the SEC guidance noted above, the Company will continue to analyze and assess the effects of the GILTI provisions of the Act.

Income tax expense consisted of the following:


$ in thousands	2018		2017			2016
Current tax expense:
Federal	$	1,719	$	891		$	974
State and local		311		120			117
Foreign		1,414		1,467			1,122

Total current tax expense		3,444		2,478			2,213

Deferred tax expense (benefit):
Federal		401		(108	)		(431	)
State and local		28		24			98
Foreign		242		(268	)		(18	)

Total deferred tax expense (benefit)		671		(352	)		(351	)

Net income tax expense	$	4,115	$	2,126		$	1,862

The reasons for the differences between the above net income tax expense and the amounts computed by applying the statutory federal income tax rate to earnings before income taxes are as follows:


$ in thousands	2018			2017			2016
Income tax expense at statutory rate	$	2,818		$	2,294		$	1,952
State and local taxes, net of federal income tax benefit (expense)		162			100			102
Tax credits (state, net of federal benefit)		(370	)		(110	)		(407	)
Effects of differing US and foreign tax rates		(97	)		(7	)		173
Rate reduction impact on deferred tax assets		680			—			—
Federal and state transition tax on unrepatriated foreign earnings		649			—			—
Increase (decrease) in valuation allowance		175			82			(10	)
Other items, net		98			(233	)		52

Net income tax expense	$	4,115		$	2,126		$	1,862

Significant items comprising deferred tax assets and liabilities as of April 30 were as follows:


$ in thousands	2018			2017
Deferred tax assets:
Accrued employee benefit expenses	$	418		$	549
Allowance for doubtful accounts		41			67
Deferred compensation		1,205			1,792
Tax credits		221			208
Unrecognized actuarial loss, defined benefit plans		1,825			3,223
Inventory Reserves		378			360
Net operating loss carryforwards		261			224
Other		79			113

Total deferred tax assets		4,428			6,536


Deferred tax liabilities:
Book basis in excess of tax basis of property, plant and equipment		(1,043	)		(1,600	)
Prepaid pension		(1,093	)		(1,696	)

Total deferred tax liabilities		(2,136	)		(3,296	)

Less: valuation allowance		(261	)		(82	)

Net deferred tax assets	$	2,031		$	3,158

Deferred tax assets classified in the balance sheet:
Non-current		2,031			3,158

Net deferred tax assets	$	2,031		$	3,158

Unremitted earnings of subsidiaries outside the United States are considered to be reinvested indefinitely at April 30, 2018. It is not practicable to determine the deferred tax liability for temporary differences related to those unremitted earnings. At April 30, 2018, the Company had state tax credit carryforwards in the amount of $221,000, net of federal benefit, expiring beginning in 2018. At April 30, 2018, the Company had $1,240,000 gross net operating losses in jurisdictions outside of the United States, of which $624,000 is set to expire in years 2020 to 2023. After a review of the expiration schedule of the net operating loss carryforwards and future taxable income required to utilize such carryforwards before their expiration, the Company recorded an additional valuation allowance of $175,000 at April 30, 2018. The Company files federal, state and local tax returns with statutes of limitation generally ranging from 3 to 4 years. The Company is generally no longer subject to federal tax examinations for years prior to fiscal year 2014 or state and local tax examinations for years prior to fiscal year 2013. Tax returns filed by the Company’s significant foreign subsidiaries are generally subject to statutes of limitations of 3 to 7 years and are generally no longer subject to examination for years prior to fiscal year 2012.