Income Taxes

12 Months Ended

Sep. 30, 2019

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted by the U.S. government. The Tax Act makes broad and complex changes to the U.S. tax code that affect our fiscal year ended September 30, 2019, including but not limited to: (1) creating the base erosion anti-abuse tax measure that taxes certain payments between a U.S. corporation and its foreign subsidiaries; (2) creating a new provision designed to tax global intangible low-tax income (“GILTI”) of foreign subsidiaries; and (3) a foreign derived intangible income. We have estimated the impact of these changes in our income tax provision for 2019.

The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The FASB Staff Q&A, Topic 740, No. 5, “Accounting for Global Intangible Low-Taxed Income”, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred as a period expense. We have elected to account for any potential GILTI tax in the period in which it is incurred.

The provision for income taxes was as follows during fiscal 2019, 2018 and 2017:



	Year ended September 30,
	2019			2018			2017
				As Adjusted			As Adjusted
	(In thousands)
Current:
Federal	$	1,299		$	8,071		$	19,576
State	(423		)	2,236			1,055
Foreign	15,371			9,559			8,486
	16,247			19,866			29,117
Deferred:
Federal	7,003			13,987			(8,523		)
State	947			132			(296		)
Foreign	(249		)	(3,535		)	2,571
	7,701			10,584			(6,248		)
Total provision	$	23,948		$	30,450		$	22,869

The foreign provision was based on foreign pre-tax earnings of $36.0 million, $10.8 million and $43.3 million in fiscal 2019, 2018 and 2017, respectively. Current foreign tax expense related to foreign tax withholdings was $6.5 million, $6.0 million and $4.6 million in fiscal 2019, 2018 and 2017, respectively. Foreign withholding tax and related foreign tax credits are included in current tax expense above.

Deferred tax assets and liabilities at September 30, 2019 and 2018 were as follows:



	September 30,
	2019			2018
				As Adjusted
	(In thousands)
Deferred tax assets:
Loss and credit carryforwards	$	26,702		$	24,377
Compensation benefits	23,931			30,388
Other assets	9,393			10,735
	60,026			65,500
Less valuation allowance	(19,231		)	(19,564		)
Total deferred tax assets	40,795			45,936
Deferred tax liabilities:
Intangible assets	(15,114		)	(15,921		)
Deferred Commission	(7,920		)	(6,368		)
Property and equipment	(3,511		)	(2,616		)
Other liabilities	(8,244		)	(7,226		)
Total deferred tax liabilities	(34,789		)	(32,131		)
Deferred tax assets, net	$	6,006		$	13,805

Based upon the level of historical taxable income and projections for future taxable income over the periods that the deferred tax assets will reverse, management believes it is more likely than not that we will realize the benefits of the deferred tax assets, net of the existing valuation allowance at September 30, 2019.

As of September 30, 2019, we had available U.S. federal, state and foreign net operating loss (“NOL”) carryforwards of approximately $10.6 million, $0.2 million, and $25.0 million, respectively. The U.S. NOLs were acquired in connection with our acquisitions of Braun in fiscal 2005, Adeptra in fiscal 2012 and Infoglide in fiscal 2013. The U.S. federal NOL carryforward will expire at various dates beginning in fiscal 2020, if not utilized. The state NOL carryforward will expire at various dates beginning in fiscal 2021, if not utilized. The $25.0 million of foreign NOL includes $3.5 million related to China and $12.7 million related to Germany. Due to a limited ability to utilize the China and Germany NOLs, a full valuation allowance has been recorded on the China and Germany NOLs, resulting in no tax benefit. Utilization of the U.S. federal and state NOL are subject to an annual limitation due to the “change in ownership” provisions of the Internal Revenue Code of 1986, as amended, and similar state provisions. In fiscal 2018 we generated approximately $3.8 million of excess federal research credits which are expected to be utilized fully in future tax years. We also have available excess California state research credit of approximately $14.1 million. The California state research credit does not have an expiration date; however, based on enacted law and expected future cash taxes, we have recorded a valuation allowance of $14.1 million.

A reconciliation of the provision for income taxes, with the amount computed by applying the U.S. federal statutory income tax rate (21% in fiscal 2019, 24.5% in fiscal 2018, and 35% in fiscal 2017) to income before provision for income taxes for fiscal 2019, 2018 and 2017 is shown below:



	Year Ended September 30,
	2019			2018			2017
				As Adjusted			As Adjusted
	(In thousands)
Income tax provision at U.S. federal statutory rate	$	45,375		$	38,495		$	54,699
State income taxes, net of U.S. federal benefit	4,194			2,755			2,072
Foreign tax rate differential	839			(649		)	(4,082		)
Intercompany interest	—			—			(477		)
Research credits	(5,761		)	(3,486		)	(2,572		)
Domestic production deduction	—			(2,421		)	(2,759		)
Amended returns/audit settlements/statute expirations	(2,268		)	(2,349		)	(1,296		)
Foreign	11,177			4,040			935
Valuation allowance	(333		)	1,907			2,512
Foreign tax credit	(464		)	1,320			(1,342		)
Excess tax benefits relating to stock-based compensation	(24,891		)	(22,253		)	(24,746		)
Tax effect of the Tax Act	—			16,719			—
Other	(3,920		)	(3,628		)	(75		)
Recorded income tax provision	$	23,948		$	30,450		$	22,869

The decrease in our income tax provision in fiscal 2019 compared to fiscal 2018 is due to the decrease in the overall federal tax rate from the blended 24.5% in fiscal 2018 to 21% in fiscal 2019 and the recording of several one-time items in fiscal 2018 related to the enactment of the Tax Act.

The increase in our income tax provision in fiscal 2018 compared to fiscal 2017 was primarily due to recording the impact related to the enactment of the Tax Act in fiscal 2018. This includes re-measurement to our deferred for the tax rate changes, the one-time deemed repatriation transition tax, and the loss of deductibility of performance-based compensation for certain employees.

As of September 30, 2019, we have approximately $95.6 million of unremitted earnings of non-U.S. subsidiaries. The Company generates substantial cash flow in the U.S. and does not have a current need for the cash to be returned to the U.S. from the foreign entities. In the event these earnings are later remitted to the U.S., any estimated withholding tax on remittance of those earnings is expected to be immaterial to the income tax provision.

Unrecognized Tax Benefit for Uncertain Tax Positions

We conduct business globally and, as a result, file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities. With a few exceptions, we are no longer subject to U.S. federal, state, local, or foreign income tax examinations for fiscal years prior to 2015. We are currently under audit by South Carolina and New York State for fiscal years 2016, 2017 and 2018. We do not anticipate any adjustments related to those audits that will result in a material change to our consolidated financial statements.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	Year Ended September 30,
	2019			2018			2017
	(In thousands)
Gross unrecognized tax benefits at beginning of year	$	6,113		$	6,480		$	6,799
Gross increases for tax positions in prior years	509			404			57
Gross decreases for tax positions in prior years	(611		)	—			(19		)
Gross increases based on tax positions related to the current year	1,439			1,625			1,291
Decreases for settlements and payments	(637		)	—			(151		)
Decreases due to statue expiration	(979		)	(2,396		)	(1,497		)
Gross unrecognized tax benefits at end of year	$	5,834		$	6,113		$	6,480

We had $5.8 million of total unrecognized tax benefits as of September 30, 2019, including $5.7 million of tax benefits that, if recognized, would impact the effective tax rate. Although the timing and outcome of audit settlements are uncertain, it is unlikely there will be a reduction of the uncertain tax benefits in the next twelve months.

We recognize interest expense related to unrecognized tax benefits and penalties as part of the provision for income taxes in our consolidated statements of income and comprehensive income. We recognize interest earned related to income tax matters as interest income in our consolidated statements of income and comprehensive income. As of September 30, 2019, we have accrued interest of $0.3 million related to the unrecognized tax benefits.